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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------



For The Fiscal Year Ended January 31, 2004 OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For the Transition Period from
 to



Commission File Number: 21859



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FACTORY CARD & PARTY OUTLET CORP.

(Exact name of registrant as specified in our charter)



|                                                              |  |                                        
|------------------------------------------------------------- |  | ---------------------------------------
|DELAWARE                                                      |  | 36-3652087                             
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. Employer Identification Number)



2727 Diehl Road,
Naperville, IL 60563-2371

(Address of principal executive offices) (Zip Code)



(630) 579-2000

(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12(b) of the
Act: None



Securities registered pursuant to Section
12(g) of the Act:



|                                                                                                                                                                                                                                                                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Title of Each Class                                                                                                                                                                                                                                                                                                                                                                                     
|Common Stock, $.01 par valueSeries A Warrants to purchase Common Stock, $.01 par value, exercisable until April 9, 2006Series B Warrants to purchase Common Stock, $.01 par value, exercisable until April 9, 2008Series C Warrants to purchase Common Stock, $.01 par value, exercisable until April 9, 2010Series D Warrants to purchase Common Stock, $.01 par value, exercisable until April 9, 2010



Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No ̈



Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K  x



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ̈No  x



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The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of August 2,
2003 was approximately $20,466,000 computed on the basis of the last reported bid price per share $8.25 of such stock on the NASDAQ National Market. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of
the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.



Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  x  No ̈



The number of shares of the Registrants Common Stock outstanding as of April 14, 2004 was 3,074,082.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the definitive Proxy Statement for Factory Card & Party
Outlet Corp.s 2004 Annual Meeting of Stockholders are incorporated by reference into Part III of the Form 10K.



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##### Table of Contents

Factory Card & Party Outlet Corp.

Annual Report on Form 10-K



TABLE OF CONTENTS



|         |  |                                                                                                |  |      
|-------- |  | ---------------------------------------------------------------------------------------------- |  | -----
|PART I  
|         |  |                                                                                                |  | Page:
|Item 1   |  | Business                                                                                       |  | 1    
|Item 2   |  | Properties                                                                                     |  | 6    
|Item 3   |  | Legal Proceedings                                                                              |  | 6    
|Item 4   |  | Submission of Matters to a Vote of Security Holders                                            |  | 6    
|        
|PART II 
|Item 5   |  | Market for the Registrants Common Stock and Related Stockholder Matters                       |  | 7    
|Item 6   |  | Selected Financial Data                                                                        |  | 8    
|Item 7   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 10   
|Item 7A  |  | Quantitative and Qualitative Disclosures About Market Risks                                    |  | 24   
|Item 8   |  | Financial Statements and Supplementary Data                                                    |  | 24   
|Item 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 25   
|Item 9A  |  | Controls and Procedures                                                                        |  | 26   
|        
|PART III
|Item 10  |  | Directors and Executive Officers of the Registrant                                             |  | 26   
|Item 11  |  | Executive Compensation                                                                         |  | 26   
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 26   
|Item 13  |  | Certain Relationships and Related Transactions                                                 |  | 26   
|Item 14  |  | Principal Accounting Fees and Services                                                         |  | 26   
|        
|PART IV 
|Item 15  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 27   
|         |  | Signatures                                                                                     |  | 30   



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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS



As used herein, unless the context otherwise requires, the
Company, we, our or us refers to Factory Card & Party Outlet Corp. and our subsidiary. As used herein, the term fiscal year refers to the 52 or 53 weeks, as applicable, ending the
Saturday nearest to January 31st, unless otherwise noted.



Statements made in this Form 10-K, and in our other public filings and releases, which are not historical facts contain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve
risks and uncertainties and are subject to change at any time. The statements are made a number of times throughout the document and may be identified by forward-looking terminology as estimate, project, expect,
believe, may, will, intend or similar statements or variations of such terms.



The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are
cautioned that these statements are only good at time made and are not guarantees of future performance and that actual results and trends in the future may differ materially. Unless otherwise required by applicable securities laws, the Company
assumes no obligation to update its forward-looking statements to reflect subsequent events or circumstances.



Factors that could cause actual results to differ materially include, but are not limited to the following:



| |  |  | ability to meet sales plans;
| | - |  | ----------------------------



| |  |  | weather and economic conditions;
| | - |  | --------------------------------



| |  |  | dependence on key personnel;
| | - |  | ----------------------------



| |  |  | competition;
| | - |  | ------------



| |  |  | ability to anticipate merchandise trends and consumer demand;
| | - |  | -------------------------------------------------------------



| |  |  | ability to maintain relationships with suppliers;
| | - |  | -------------------------------------------------



| |  |  | successful implementation of information systems;
| | - |  | -------------------------------------------------



| |  |  | successful handling of merchandise logistics;
| | - |  | ---------------------------------------------



| |  |  | inventory shrinkage;
| | - |  | --------------------



| |  |  | ability to meet future capital needs;
| | - |  | -------------------------------------



| |  |  | seasonality of business;
| | - |  | ------------------------



| |  |  | disruption with our imported product;
| | - |  | -------------------------------------



| |  |  | vendor performance;
| | - |  | -------------------



| |  |  | political unrest;
| | - |  | -----------------



| |  |  | consumer confidence and consumer spending;
| | - |  | ------------------------------------------



| |  |  | ability to maintain compliance with bank covenants;
| | - |  | ---------------------------------------------------



| |  |  | availability and cost of real estate;
| | - |  | -------------------------------------



| |  |  | adverse developments with respect to litigation;
| | - |  | ------------------------------------------------



| |  |  | changes in accounting policies and practices;
| | - |  | ---------------------------------------------



| |  |  | governmental regulations and
| | - |  | ----------------------------



| |  |  | other factors both referenced and not referenced in this Form 10-K.
| | - |  | -------------------------------------------------------------------



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##### Table of Contents

PART I



ITEM 1.    
BUSINESS



General



Factory Card & Party Outlet Corp. and our subsidiary, Factory Card
Outlet of America Ltd. are a specialty retailer offering a wide selection of party supplies, greeting cards, giftwrap, balloons, gifts, seasonal merchandise and other special occasion merchandise at everyday value prices. As of April 14, 2004, we
operated 179 stores in 20 states. Based on the published number of stores of our competitors as compiled by various business publications and other publicly available information, we believe we are one of the largest chains of company-owned stores
in the party supply, greeting card, and special occasion industry. Our fiscal year ends on the 52 or 53 weeks, as applicable, ending the Saturday nearest to January 31st. Fiscal 2003 is the period February 2, 2003 to January 31, 2004. Fiscal 2002 is
the period February 3, 2002 to February 1, 2003 and fiscal 2001 is the period February 4, 2001 to February 2, 2002. We opened six new stores in fiscal 2003 and we currently have plans to open up to ten additional stores in fiscal 2004. These are the
first store openings in over five years. We did not close any stores in fiscal 2003, closed one store in fiscal 2002, and closed three stores in fiscal 2001.



Our stores provide customers with a value-oriented, one-stop shopping solution for party supply, greeting card and special occasion
merchandise for all major holidays and celebratory events, including birthdays, graduations, weddings and baby showers as well as seasonal events including Valentines Day, St. Patricks Day, Easter, Mothers Day, Fathers Day,
Fourth of July, Halloween, Thanksgiving, Christmas and New Years Day and other family, religious and special occasions. Our stores average approximately 12,000 square feet, with approximately 80% of the space devoted to selling space, and are
designed to provide ease of shopping within an attractive, spacious and festive environment.



On September 10, 2003, we announced a two-for-one stock split effective October 21, 2003 for holders of record on October 7, 2003. Accordingly, data related to our Common Stock (number of shares, average shares
outstanding and earnings per share) have been adjusted for the prior periods subsequent to emergence to reflect the impact of this stock split.



Industry Overview



Traditionally, the retail party supplies business has been fragmented, with consumers purchasing party-related products from party supply stores and
designated departments in drug stores, general mass merchandisers, supermarkets and department stores of local, regional and national chains. According to industry sources, the market for party and special occasion merchandise, comprised of party
supplies, greeting cards, gift-wrap, and related items, was estimated at $14 billion in sales in 2002.



Proceedings Under Chapter 11 of the Bankruptcy Code and Reorganization



On March 23, 1999, we filed with the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court) petitions for
reorganization under chapter 11 of title 11 of the United States Code (the Bankruptcy Code). On March 20, 2002, the Bankruptcy Court confirmed our Amended Plan of Reorganization (the Plan) that was filed with the Bankruptcy
Court on February 5, 2002. On April 9, 2002 (the Effective Date) the Plan of Reorganization became effective and we successfully emerged from Chapter 11.



Certain of the principal provisions of the Plan are as follows:



| |  |  | We authorized an aggregate of 10,000,000 shares of new Common Stock, par value $0.01 per share. Our amended and restated certificate of incorporation prohibits the transfer of any
shares of the new Common Stock or any rights to acquire shares of the new Common Stock to any person or group that is a 5% or higher shareholder of Factory Card & Party Outlet Corp.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The common stock of Factory Card & Party Outlet Corp. that was outstanding immediately prior to the Plan becoming effective was canceled and 149,106 shares of
our new Common Stock were issued to
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | holders of the canceled common stock at a ratio of .019846 shares of new Common Stock for each share of canceled common stock.
| | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | We issued 2,699,990 shares of the new Common Stock to holders of unsecured claims against us, or General Unsecured Creditors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | We issued 150,000 shares of the new Common Stock to certain members of our management, vesting ratably over a four-year period, as specified in the Plan, and warrants to purchase an
aggregate 62,000 shares of our new Common Stock at a purchase price of $3.76 per share. On June 7, 2002, 25,800 warrants were exercised and the remaining 36,200 warrants expired.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We issued four series of new Warrants, Series A through D, to tendering holders of the canceled common stock, granting such holders the right to purchase an aggregate of 306,934
additional shares of the new Common Stock. The Series A Warrants are exercisable any time prior to April 9, 2006 at a price of $5.50 per share. The Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $8.00 per share.
The Series C Warrants are exercisable any time prior to April 9, 2010 at a price of $8.00 per share. The Series D Warrants are exercisable any time prior to April 9, 2010 at a price of $17.00 per share.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We adopted an employee stock option plan, the 2002 Stock Option Plan, to provide our eligible employees with the opportunity to purchase an aggregate 333,334 shares of our new
Common Stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We agreed to pay $1 million to the General Unsecured Creditors within 60 days of the Effective Date and agreed to pay the General Unsecured Creditors, three years from emergence an
aggregate of $2.6 million, less any prepayments.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We converted an aggregate of $3.13 million post petition accounts payable into long-term convertible secured subordinated notes (the Trade Conversion Notes) to seven
trade vendors and suppliers (the Trade Participants). This obligation is secured by a subordinated lien on certain of our property. The Trade Participants each have the right to convert their Trade Conversion Notes in whole, or in part,
into an aggregate of 29.35% of the new Common Stock, at any time between April 9, 2005 (the third anniversary of the Plans Effective Date) and April 9, 2006 (the fourth anniversary of such date), subject to adjustments to reflect any
prepayments made by us.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We entered into five separate agreements with various trade vendors, each dated April 9, 2002, pursuant to which such trade vendors agreed to provide us with payment terms,
including extended payment terms and seasonal advances.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We entered into a $40 million secured financing facility with Wells Fargo LLC, which became effective concurrent with the Plan, to repay the outstanding amounts owed under our debtor in possession revolving financing agreement and fund our
obligations under the Plan and our ongoing operations following emergence from bankruptcy. Borrowings under this agreement are secured by substantially all of our assets.



Business Strategy



Our goal is to become a leading national specialty retailer and top of the mind customer solution in the party supply, greeting card, and special occasion
industry through merchandising innovation, value orientation and controlled growth.



The key elements of our current strategy are as follows:



Merchandise Offering.    We offer a wide selection of greeting cards, giftwrap, balloons, everyday and seasonal party supplies and special occasion merchandise. With over 23,000 SKUs in each
of our stores, our stores provide a single solution for a customers special occasion product needs. The stores offer product selections for all major holidays and seasonal events, such as Valentines Day, St. Patricks Day, Passover,
Easter, Administrative Assistants Day, Mothers Day, Fathers Day, Grandparents Day, Fourth of July, Rosh Hashanah, Halloween, Thanksgiving, Christmas, Hanukkah and New Years; celebratory events, including



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birthdays, graduations, weddings and baby showers; and other family, religious and special occasions. The following five major product categories comprise
our merchandise offering:



| |  |  | Party SuppliesWe stock a broad selection of party supply merchandise for everyday and special occasions in a wide variety of attractive patterns and distinctive colors
including an extensive selection of licensed party patterns in popular childrens themes. Party supplies include tableware, tablecovers, cutlery, invitations, party favors, milestone birthday items, piñatas, banners, decorations,
candles, décor, catering products and other related party items.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Greeting CardsOur stores feature approximately 4,000 titles of high quality, everyday and seasonal greeting cards for all occasions, all typically sold at an everyday low
price of 59 cents. Boxed everyday and holiday cards are regularly sold at substantial discounts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | GiftwrapWe believe our stores have become a solution for shoppers seeking a wide selection of giftwrap and giftwrap accessories and sell most of these items at lower prices
than competitors. Items include glossy, printed, solid and foil giftwrap, solid and printed ribbons, bows, gift bags, gift boxes, tissue paper and gift tags.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | BalloonsBalloons are increasingly popular for all occasions. Our stores offer value in mylar and latex balloons and carry popular licensed designs along with a large selection
for any occasion.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other Special Occasion MerchandiseWe complement our major product lines by offering many other special occasion items in order to provide a one-stop shopping
solution for customers. These items include candy, birthday and wedding items, candles and candleholders, stationery, gifts, novelty items and seasonal products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Everyday Value Pricing.    Our strategy of everyday value pricing is designed to provide
customers with consistent value on purchases. Our stores feature a power aisle offering a wide selection of opportunistic buys and manufacturers seasonal over-runs, all priced at deep discounts and frequently changed to create
continued customer interest.



Attractive, Spacious and
Festive Superstore Format.    We have an attractive and festive atmosphere within a spacious easy to shop store. The superstores are designed to provide a comfortable and convenient shopping experience, with
bright lights and fixtures that offer customers easy access to merchandise. Our average store size is approximately 12,000 square feet.



Targeted Advertising.    We utilize a storewide direct mail program to reach targeted customers and highlight the breadth and
value of our merchandise. The direct mail pieces are printed in color and range from four to twelve pages depending on the season. We plan to continue this direct mail program and support all holidays and special events. We have also used radio
advertising to support selected major holiday selling seasons.



Distribution Center and Office Complex.    Our three-story office building and 300,000 square-foot distribution center is on 39 acres. The lease agreement provides for the expansion of the warehouse to
600,000 square feet, as needed. We believe we are one of a few special occasion store chains to have a distribution facility. We believe the distribution facility can provide us with purchasing, inventory management, store operating and distribution
efficiencies.



Store Locations.



As of April 14, 2004, we operated 179 stores in 20 states, all of which are
leased. Our store leases typically have an average initial term of 10 years with two five-year renewal options. We currently have plans to open up to ten additional stores in fiscal 2004. We were happy to announce the opening of six new stores in
fiscal 2003. These new store openings were the first in five years.



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|                   |  |                
|------------------ |  | ---------------
|Location           |  | Number ofStores
|Delaware (1)       |  |                
|Wilmington         |  | 1              
|Florida (9)        |  |                
|Gainesville        |  | 1              
|Jacksonville       |  | 1              
|Cape Coral         |  | 1              
|Port Orange        |  | 1              
|Ormond Beach       |  | 1              
|Tampa              |  | 1              
|Altamonte Springs  |  | 1              
|Bradenton          |  | 1              
|Lakeland           |  | 1              
|Illinois (37)      |  |                
|Chicago Metro      |  | 29             
|Bloomington        |  | 1              
|Champaign          |  | 1              
|DeKalb             |  | 1              
|Fairview Heights   |  | 1              
|Moline             |  | 1              
|Peoria             |  | 1              
|Rockford           |  | 1              
|Springfield        |  | 1              
|Indiana (20)       |  |                
|Indianapolis Metro |  | 7              
|Anderson           |  | 1              
|Bloomington        |  | 1              
|Clarksville        |  | 1              
|Evansville         |  | 2              
|Fort Wayne         |  | 1              
|Highland           |  | 1              
|Lafayette          |  | 1              
|Merrillville       |  | 1              
|Michigan City      |  | 1              
|Mishawaka          |  | 1              
|Muncie             |  | 1              
|Richmond           |  | 1              
|Iowa (7)           |  |                
|Des Moines Metro   |  | 3              
|Cedar Rapids       |  | 1              
|Davenport          |  | 1              
|Dubuque            |  | 1              
|Waterloo           |  | 1              



|                           |  |                
|-------------------------- |  | ---------------
|Location                   |  | Number ofStores
|Kentucky (5)               |  |                
|Louisville Metro           |  | 3              
|Florence                   |  | 1              
|Owensboro                  |  | 1              
|Maryland (14)              |  |                
|Baltimore Metro            |  | 7              
|Washington, D.C.Metro (MD) |  | 4              
|Salisbury                  |  | 1              
|Rosedale                   |  | 1              
|Bowie                      |  | 1              
|Michigan (1)               |  |                
|Benton Harbor              |  | 1              
|Minnesota (6)              |  |                
|Minneapolis St. Paul Metro |  | 4              
|Mankato                    |  | 1              
|Rochester                  |  | 1              
|Missouri (10)              |  |                
|St. Louis Metro            |  | 6              
|Cape Girardeau             |  | 1              
|Columbia                   |  | 1              
|Joplin                     |  | 1              
|Springfield                |  | 1              
|Nebraska (5)               |  |                
|Omaha Metro                |  | 3              
|Lincoln                    |  | 1              
|Grand Island               |  | 1              
|New York (9)               |  |                
|Buffalo Metro              |  | 3              
|Albany                     |  | 1              
|Olean                      |  | 1              
|Rochester                  |  | 3              
|Syracuse                   |  | 1              
|North Carolina (3)         |  |                
|Charlotte                  |  | 1              
|Raleigh                    |  | 1              
|Winston Salem              |  | 1              



Set forth below is a
list of our store locations by state as of April 14, 2004:



|                           |  |               
|-------------------------- |  | --------------
|Location                   |  | NumberofStores
|Ohio (19)                  |  |               
|Cincinnati Metro           |  | 3             
|Cleveland Metro            |  | 4             
|Columbus Metro             |  | 5             
|Akron                      |  | 2             
|Dayton                     |  | 1             
|Lancaster                  |  | 1             
|Mansfield                  |  | 1             
|St. Clairsville            |  | 1             
|Wooster                    |  | 1             
|Pennsylvania (5)           |  |               
|Erie                       |  | 1             
|Hanover                    |  | 1             
|State College              |  | 1             
|Wilkes Barre- Scranton     |  | 2             
|South Carolina (2)         |  |               
|Charleston                 |  | 1             
|Greenville                 |  | 1             
|Tennessee (5)              |  |               
|Chattanooga                |  | 2             
|Memphis                    |  | 1             
|Nashville                  |  | 2             
|Virginia (6)               |  |               
|Washington D.C. Metro (VA) |  | 1             
|Fredericksburg             |  | 1             
|Lynchburg                  |  | 1             
|Norfolk-Newport News       |  | 2             
|Richmond                   |  | 1             
|West Virginia (1)          |  |               
|Clarksburg                 |  | 1             
|Wisconsin (14)             |  |               
|Milwaukee Metro            |  | 6             
|Appleton                   |  | 1             
|Eau Claire                 |  | 1             
|Green Bay                  |  | 1             
|Janesville                 |  | 1             
|Madison                    |  | 2             
|Oshkosh                    |  | 1             
|Wausau                     |  | 1             
|                           |  |               
|Total                      |  | 179           
|                           |  |               



New store sites are
selected on the basis of several factors, including physical location, demographic characteristics of the local market, co-tenants, visibility, population density, traffic counts, proximity to superstore competitors, access to highway and other
major roadways and available lease terms. We look for co-tenants that are likely to draw customers whom we would otherwise target within the sites relevant market.



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Product Sourcing



We have historically been able to take advantage of volume purchase discounts due to our size and the use of our distribution center. We purchase our
inventory from more than 300 vendors worldwide, with the largest supplier, Amscan, Inc., representing approximately 20% and the ten largest suppliers representing approximately 47% of our aggregate purchases for the fiscal year ended January 31,
2004. Approximately 9% of our merchandise is imported from foreign manufacturers or their agents, principally from the Far East and England. As is customary in our industry, we generally do not have long-term contracts with any suppliers, however,
pursuant to the Plan, we entered into agreements with certain trade vendors to provide us with payment terms, including extended payment terms and seasonal advances.



We believe our well-established relationships with suppliers have historically provided us with an advantage over many of
our competitors by enabling us to offer an extensive selection of distinctive products at higher gross margins.



Management Information Systems



We believe that our management information systems are an important factor in supporting our business and enhancing our competitive position in the
industry. Over the past three years, we have invested significant resources in systems and infrastructure to support our business and make us more efficient. We use a management information and control system, which is based on the JDA Merchandise
Management System software package (JDA) and supports the complete range of retail cycle functions in the areas of finance, merchandising and distribution. All stores are linked to our headquarters through personal computers, which
interface with an IBM AS/400 and provide auto-replenishment of inventory and the ability to enter payroll information and send and receive electronic mail. These personal computers are also tied into our point-of-sale system (POS
system). The POS system provides sales information to our stores and central office and is used to enhance merchandise planning and buying programs.



Competition



The greeting card, party supply and special occasion industry is highly competitive. We currently compete against a diverse group of retailers, ranging
from other party supply and greeting card retailers to designated departments in drug stores, general mass merchandisers, supermarkets, dollar stores and department stores of local, regional and national chains. Major chain competitors in our
markets include Party City, Party America and Party Concepts. We also compete with internet and catalog businesses with similar merchandise and product offerings. In addition, a trend toward discounting the cost of party supplies and greeting cards
has developed and we may encounter additional competition from new entrants or internet vendors in the future. Our stores compete, among other things, on the basis of convenience of location and store layout, product mix, selection, customer
convenience and price. Some of our competitors have substantially greater financial resources and experience than us.



Trademarks



We have registered trademarks under the name of Factory Card & Party Outlet®, Factory Card Outlet®, Partymania®, the Factory Card & Party Outlet® design and the Partymania® design on the Principal Register of the United States Patent and Trademark Office.



Government Regulation



Each of our stores must comply with regulations adopted by Federal agencies
and with licensing and other regulations enforced by state and local health, sanitation, safety, fire and other departments. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental
factors, and difficulties or failures in obtaining the required licenses or approvals, can delay and sometimes prevent, the



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opening of a new store. In addition, we must comply with the Fair Labor Standards Act and various state laws governing various matters such as minimum wage,
overtime and other working conditions. We also must comply with the provisions of the Americans with Disabilities Act of 1990, as amended, which requires generally that employers provide reasonable accommodation for employees with disabilities and
that stores be accessible to customers with disabilities.



Employees



We have approximately 2,400 employees as of April 14,
2004, comprising approximately 1,100 full-time and approximately 1,300 part-time employees. The number of store employees increases during peak selling seasons. Our employees are not covered by a collective bargaining agreement. We believe relations
with our employees are generally good.



Reorganization



On April 9, 2002, we consummated a joint plan of reorganization under
Chapter 11 of the Bankruptcy Code pursuant to a February 5, 2002 order entered by the U.S. Bankruptcy Court for the District of Delaware approving our joint plan of reorganization. We have been operating out of bankruptcy since April 9, 2002. See
Managements Discussion and Analysis of Financial Condition and Results of Operations.



ITEM 2.    
PROPERTIES



In addition to our
stores, all of which are leased, we also lease a distribution center in Naperville, Illinois, with the initial lease term expiring in February 2008. We have the option to renew the initial term of the lease for an additional period of 5 years. This
facility consists of a three-story office building and 300,000 square-foot distribution center that sits on 39 acres of land.



The initial term of our store leases range from 5 to 10 years and generally allow us to renew for up to two additional five-year terms. The terms of a
majority of the leases, including renewal terms, extend beyond year 2007.



ITEM 3.    
LEGAL PROCEEDINGS



On March 3,
2004, Midwest One Distribution Company filed a lawsuit against us in the Circuit Court of the Eighteen Judicial Circuit of DuPage County, Illinois, captioned Midwest One Distribution Co. vs. Factory Card & Party Outlet Corp. and Factory Card
Outlet of America, Ltd. The lawsuit alleges that we breached a distribution agreement between the parties that terminated on January 31, 2004 by failing to pay certain invoices from Midwest One for certain services and/or expenses allegedly
performed or incurred by Midwest One. Midwest One seeks damages of approximately $4.8 million and an accounting of all distribution services for which Midwest One was entitled to compensation under the distribution agreement. We believe that we have
meritorious defenses and counterclaims and intend to pursue them vigorously.



Additionally, we are from time to time involved in routine litigation incidental to the conduct of our business. As of the date of this Annual Report on Form 10-K, we are not aware of any other material existing or
threatening litigation to which we are or may be a party.



ITEM
4.    
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



Not Applicable.



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PART II



ITEM 5.    
MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS



Our new Common Stock began trading on the OTC Bulletin Board, an electronic quotation service for NASDAQ Market Makers on May 30, 2002 under the symbol
FCPO.OB. In November 2003 the symbol for our Common Stock was changed to FCPO as a result of the re-listing on the NASDAQ National Market. The following table sets forth the high and low closing sale prices of our Common
Stock as reported on the NASDAQ National Market for the periods indicated.



|                                                                                                    |  |      |       |     |   |      
|--------------------------------------------------------------------------------------------------- |  | ---- | ----- | --- | - | -----
|Fiscal 2003                                                                                         |  | High |       | Low
|February 2, 2003 to May 3, 2003 [first fiscal quarter]                                              |  | $    | 3.00  |     | $ | 2.25 
|May 4, 2003 to August 2, 2003 [second fiscal quarter]                                               |  |      | 8.87  |     |   | 2.65 
|August 3, 2003 to November 1, 2003 [third fiscal quarter]                                           |  |      | 19.50 |     |   | 6.12 
|November 2, 2003 to January 31, 2004 [fourth fiscal quarter]                                        |  |      | 22.68 |     |   | 11.99
|                                                                                                    |  |     
|Fiscal 2002                                                                                         |  | High |       | Low
|May 30, 2002 to August 3, 2002 [first trade on May 30, 2002 which was in our second fiscal quarter] |  | $    | 6.72  |     | $ | 2.50 
|August 4, 2002 to November 2, 2002 [third fiscal quarter]                                           |  |      | 6.00  |     |   | 3.12 
|November 3, 2002 to February 1, 2003 [fourth fiscal quarter]                                        |  |      | 4.25  |     |   | 2.75 



On April 14, 2004, the
number of holders of record of the Common Stock was approximately 460.



On September 10, 2003, we announced a two-for-one stock split effective October 21, 2003 for holders of record on October 7, 2003. Accordingly, data related to our Common Stock price has been adjusted to reflect the impact of this stock
split.



Dividends



We have never paid cash dividends on our Common Stock and we do not intend
to pay cash dividends in the foreseeable future. We expect earnings will be retained for the continued development of our business. In addition, our financing facility prohibits us from paying dividends on our capital stock. See
Managements Discussion and Analysis of Financial Condition and Results of Operations and Liquidity and Capital Resources.



Unregistered Securities



On April 9, 2002 we emerged from bankruptcy. In connection with our plan of reorganization, we issued the following securities without registration under
the Securities Act of 1933 in reliance on Section 1 of the Bankruptcy Code and the Bankruptcy Court order confirming our plan of reorganization:



| |  |  | 149,106 shares of our Common Stock to holders of our canceled common stock;
| | - |  | ---------------------------------------------------------------------------



| |  |  | 2,699,990 shares of our Common Stock to holders of unsecured claims against us;
| | - |  | -------------------------------------------------------------------------------



| |  |  | 150,000 shares of our Common Stock to certain members of management, vesting ratably over a four-year period, and warrants to purchase an aggregate of 62,000 shares of our Common
Stock at a purchase price of $3.76 per share;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | and four series of warrants, Series A through D, to holders of our canceled common stock, granting such holders the right to purchase an aggregate of 306,934 additional shares of
our Common Stock as follows: Series A warrants are exercisable any time prior to April 9, 2006 at a price of $5.50 per share; Series B warrants are exercisable any time prior to April 9, 2008 at a price of $8.00 per share; Series C warrants are
exercisable any time prior to April 9, 2010 at a price of $8.00 per share; and Series D warrants are exercisable any time prior to April 9, 2010 at a price of $17.00 per share.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

In addition, prior to expiration in June 2002 of the warrants to purchase 62,000 shares of our Common
Stock granted to management, certain members of management acquired an aggregate of 25,800 shares of our Common Stock upon exercise of such warrants. This issuance of shares was exempt from the registration requirements of the Securities Act of 1933
pursuant to Section 4(2) of such Act.



ITEM 6.    
SELECTED FINANCIAL DATA



The
following table sets forth certain selected historical financial data that was derived from the consolidated financial statements of the Company. The selected financial data presented under the captions Statement of Operations Data and
Balance Sheet Data as of January 31, 2004, February 1, 2003 and April 6, 2002 and for the 52-weeks ended January 31, 2004, the 43-weeks ended February 1, 2003 and the Nine weeks ended April 6, 2002 are derived from the consolidated
financial statements of the Company, which have been audited by Deloitte & Touche LLP, independent certified public accountants.



The selected financial data presented on the next page under the captions Statement of Operations Data and Balance Sheet Data as
of February 2, 2002, February 3, 2001 and January 29, 2000 and for the 52-weeks ended February 2, 2002, the 53-weeks ended February 3, 2001 and the 52-weeks ended January 29, 2000 are derived from the consolidated financial statements of the
Company, which have been audited by KPMG LLP, independent certified public accountants.



The information set forth below should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the Companys consolidated financial
statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.



8



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##### Table of Contents

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

(Dollar amounts in thousands, except per share data)



|                                              |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|--------------------------------------------- |  | ------------------------------- | --------- | -- | ------------------------------ | - | --------- | ---------------------------- |  | - | -------------------------- | - |  | -------------------------- | ------- | - | --------------------------- | - | ------- | - |  | - | ------- | -
|                                              |  | 52-Weeks ended January 31, 2004 |           |    | 43-Weeksended February 1, 2003 |   |           | Nine Weeksended April 6,2002 |  |   | 52-Weeksended Feb. 2, 2002 |   |  | 53-Weeksended Feb. 3, 2001 |         |   | 52-Weeksended Jan. 29, 2000 |  
|                                              |  | SuccessorCompany                |           |    | SuccessorCompany               |   |           | PredecessorCompany           |  |   | PredecessorCompany         |   |  | PredecessorCompany         |         |   | PredecessorCompany          |  
|Statement of Operations Data:                 |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Net sales                                     |  | $                               | 222,635   |    |                                | $ | 185,699   |                              |  | $ | 40,837                     |   |  | $                          | 227,943 |   |                             | $ | 226,122 |   |  | $ | 217,658 |  
|Cost of sales                                 |  |                                 | 145,372   |    |                                |   | 122,435   |                              |  |   | 26,991                     |   |  |                            | 149,871 |   |                             |   | 150,686 |   |  |   | 150,755 |  
|                                              |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Gross profit                                  |  |                                 | 77,263    |    |                                |   | 63,264    |                              |  |   | 13,846                     |   |  |                            | 78,072  |   |                             |   | 75,436  |   |  |   | 66,903  |  
|Selling, general and administrative expenses  |  |                                 | 71,851    |    |                                |   | 55,872    |                              |  |   | 12,212                     |   |  |                            | 67,311  |   |                             |   | 65,597  |   |  |   | 64,632  |  
|Depreciation                                  |  |                                 | 1,957     |    |                                |   | 1,501     |                              |  |   | 1,030                      |   |  |                            | 6,826   |   |                             |   | 7,196   |   |  |   | 7,729   |  
|Reorganization items(1)                       |  |                                 |          |    |                                |   |          |                              |  |   | (18,840                    | ) |  |                            | 6,653   |   |                             |   | 7,998   |   |  |   | 20,374  |  
|Interest expense                              |  |                                 | 1,182     |    |                                |   | 1,368     |                              |  |   | 374                        |   |  |                            | 2,813   |   |                             |   | 3,344   |   |  |   | 3,049   |  
|                                              |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Income (loss) before income taxes (benefit)   |  |                                 | 2,273     |    |                                |   | 4,523     |                              |  |   | 19,070                     |   |  |                            | (5,531  | ) |                             |   | (8,699  | ) |  |   | (28,881 | )
|Income tax expense (benefit)                  |  |                                 | 911       |    |                                |   | 1,981     |                              |  |   | (360                       | ) |  |                            |        |   |                             |   |        |   |  |   |        |  
|                                              |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Net income (loss)                             |  | $                               | 1,362     |    |                                | $ | 2,542     |                              |  | $ | 19,430                     |   |  | $                          | (5,531  | ) |                             | $ | (8,699  | ) |  | $ | (28,881 | )
|                                              |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Earnings per sharebasic(2)                   |  | $                               | 0.47      |    |                                | $ | 0.89      |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|                                              |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Weighted average shares outstanding           |  |                                 | 2,919,115 |    |                                |   | 2,866,420 |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|                                              |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Earnings per sharediluted(2)                 |  | $                               | 0.40      |    |                                | $ | 0.86      |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|                                              |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Weighted average shares outstanding           |  |                                 | 3,426,179 |    |                                |   | 2,957,516 |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|                                              |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Operating Data: (Unaudited)                   |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Number of stores:                             |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Opened during period                          |  |                                 | 6         |    |                                |   | 0         |                              |  |   | 0                          |   |  |                            | 0       |   |                             |   | 0       |   |  |   | 0       |  
|Closed/relocated during period                |  |                                 | 0         |    |                                |   | 1         |                              |  |   | 0                          |   |  |                            | 3       |   |                             |   | 7       |   |  |   | 28      |  
|Open at end of period                         |  |                                 | 177       |    |                                |   | 171       |                              |  |   | 172                        |   |  |                            | 172     |   |                             |   | 175     |   |  |   | 182     |  
|Comparable store sales increase (decrease)(3) |  |                                 | (2.0      | %) |                                |   | (1.3      | %)                           |  |   | 8.6                        | % |  |                            | 5.1     | % |                             |   | 5.0     | % |  |   | 0.7     | %
|Average sales per store(4)                    |  | $                               | 1,295     |    |                                | $ | 1,084     |                              |  | $ | 237                        |   |  | $                          | 1,316   |   |                             | $ | 1,264   |   |  | $ | 1,175   |  
|Balance Sheet Data (end of period):           |  |                                 |           |    |                                |   |           |                              |  |   |                            |   |  |                            |         |   |                             |   |         |   |  |   |         |  
|Working capital                               |  | $                               | 15,134    |    |                                | $ | 15,076    |                              |  | $ | 10,392                     |   |  | $                          | 17,293  |   |                             | $ | 16,362  |   |  | $ | 18,969  |  
|Total assets                                  |  |                                 | 58,172    |    |                                |   | 60,040    |                              |  |   | 63,311                     |   |  |                            | 81,299  |   |                             |   | 83,712  |   |  |   | 90,803  |  
|Total debt(5)                                 |  |                                 | 15,597    |    |                                |   | 23,857    |                              |  |   | 32,460                     |   |  |                            | 27,903  |   |                             |   | 26,017  |   |  |   | 22,869  |  
|Total long term debt obligations              |  |                                 | 3,699     |    |                                |   | 5,889     |                              |  |   | 6,632                      |   |  |                            | 338     |   |                             |   |        |   |  |   |        |  
|Total stockholders equity (deficit)          |  |                                 | 17,947    |    |                                |   | 15,154    |                              |  |   | 10,040                     |   |  |                            | (18,933 | ) |                             |   | (13,402 | ) |  |   | (4,703  | )

---

|(1) |  | The extraordinary item of $1,292 previously recorded in the 52-weeks ended January 29, 2000 has been reclassified to Reorganization items in accordance with SFAS No. 145,
Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The per share and share information for the Predecessor Company has been omitted as such information is not deemed to be meaningful due to the fresh- start accounting entries booked
for the Successor Company and the resulting lack of comparability to Predecessor Company periods.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes stores open 13 or 14 months after their opening date. If the opening date of a store falls in the first 14 days of a period, then it will be included in the comparable
store calculation in its 13th month of operation; otherwise, a store is included in the comparable store calculation in its 14th month of operation. A stores sales are excluded from the calculation of comparable sales in the fiscal month of
the store closing.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes only stores open during the entire period.
|--- |  | ---------------------------------------------------

|(5) |  | Total debt is defined as total current and long-term debt, including capital lease obligations.
|--- |  | -----------------------------------------------------------------------------------------------

|(6) |  | On September 10, 2003, we announced a two-for-one stock split effective October 21, 2003 for holders of record on October 7, 2003. Accordingly, data related to Common Stock (number
of shares, average shares outstanding and earnings per share) have been adjusted for the prior periods subsequent to emergence to reflect the impact of this stock split.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



Overview



We are a specialty retailer offering a wide selection of party supplies, greeting cards, giftwrap, gifts, balloons, and other special occasion merchandise
at everyday value prices. As of April 14, 2004, we operated 179 stores in 20 states. We currently have plans to open up to ten additional stores in fiscal 2004. Please note all Company filings with the Securities & Exchange Commission can be
viewed by visiting our website under Press Releases at www.factorycard.com.



Chapter 11 Proceedings and Reorganization



On
March 23, 1999, we filed with the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court) petitions for reorganization under chapter 11 of title 11 of the United States Code (the Bankruptcy Code).
On March 20, 2002, the Bankruptcy Court confirmed our Amended Plan of Reorganization (the Plan) that was filed with the Bankruptcy Court on February 5, 2002. On April 9, 2002 (the Effective Date) the Plan of Reorganization
became effective and we successfully emerged from Chapter 11.



Juvenile
Party Expansion



In fiscal 2003 we entered into agreements
with Party Express by Hallmark and Designware by American Greetings to sell licensed party tableware and accessories. This new assortment has increased the selection of our juvenile party patterns by approximately 30% and increased the selection of
licensed party patterns and accessories by more than 150%. We believe this new assortment puts us in a favorable position to compete in the expanding market of juvenile party.



Critical Accounting Policies



Critical Accounting Policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in
materially different results under different assumptions and conditions. We have prepared the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America, which require management to
make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. We have identified the following critical
accounting policies utilized in the preparation of these financial statements.



Fresh Start Accounting



As is more fully discussed in Note 3 Fresh Start Accounting in our Notes to Consolidated Financial Statements, we adopted fresh start accounting pursuant to the American Institute of Certified Public Accountants Statement
of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7), during the first quarter of fiscal 2002 resulting in a change in the basis of accounting of our underlying assets and
liabilities at the Effective Date. Accordingly, our financial statements before and after the Effective Date are not comparable. The operating results for the nine weeks ended April 6, 2002 were significantly impacted by items associated with
emerging from bankruptcy including debt forgiveness, restructuring activities and certain changes to record the excess of book value over enterprise value. Upon implementation of fresh start accounting, our total assets and total liabilities and
stockholders equity were adjusted downward by approximately $17 million.



Revenue Recognition



Revenues include the selling price of party goods sold, net of returns and discounts, and are recognized at the point of sale. We estimate returns based upon historical return rates and such amounts have not been significant.



10



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##### Table of Contents

Impairment of Long-Lived Assets



We adopted Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets in fiscal 2002, which requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell. The adoption of SFAS No. 144 did not have a material impact on our consolidated results of
operations in 2002.



We review each store for impairment
indicators annually, considering operating results and cash flows. We are not aware of any impairment indicators for any of our stores at January 31, 2004.



Merchandise Inventories



As discussed in Note 4 Summary of Significant Accounting Polices in the Notes to the Consolidated Financial Statements, merchandise
inventories are stated at the lower of average cost or estimated net realizable value utilizing the retail method. We perform periodic evaluations of the net realizable value of merchandise, including merchandise which is to be discontinued from our
ongoing inventory assortment as well as inventory with excess quantities on hand and certain seasonal inventory remaining from past holidays. Based upon these evaluations, a provision for the excess of inventory cost over the net realizable value is
recorded as a reduction to the net inventory balance. At January 31, 2004 and February 1, 2003, we had reserves of $1.1 and $1.5 million respectively, for certain merchandise, which is to be discontinued from our ongoing inventory assortment, as
well as inventory with excess quantities on hand, and certain seasonal inventory from past holidays.



Prior to our emergence from bankruptcy, we capitalized certain buying and warehousing costs as a component of inventory. As of the emergence date, we
discontinued this practice, recording all of the aforementioned costs in cost of sales. Going forward, we do not anticipate that the change will have a significant impact on periodic earnings.



We receive vendor allowances principally as a result of meeting defined
purchase levels or promoting vendors products. Those received as a result of purchase levels are accrued as a reduction of merchandise purchase price over the incentive period and result in a reduction of cost of sales. Those received for
promoting vendors products are offset against advertising expense and result in a reduction of selling, general and administrative expenses. Markdown allowances reduce cost of goods sold in the period the related markdown is taken. Placement
allowances are offset against incremental expenses incurred and the remainder, if any, over the contract period. In September 2002, the Emerging Issues Task Force (EITF) issued 02-16 Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor, which addressed the accounting for rebates retailers receive from vendors. Our accounting policies relating to cash received from vendors are consistent with the conclusions reached by the
EITF.



Liabilities for Insurance Claims



Provision for these losses to the extent not insured are recorded based upon
our estimated losses for claims incurred. The provisions are based upon our historical cost.



Income Taxes



Historically, we have not recognized an income tax benefit for our losses. We have recorded a valuation allowance to fully reserve for the value of the net deferred tax assets that existed upon emergence from bankruptcy. This allowance on
pre-emergence deferred tax assets is necessary, as the utilization of our net loss carryforwards is dependent upon sufficient future taxable income. Under fresh start accounting, reversals of valuation reserves recorded against deferred tax assets
that existed as of the emergence date will result in an increase to paid-in capital. Consequently, we will recognize cash tax savings in the year of asset recognition without the corresponding benefit to income tax expense.



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We have recorded new deferred tax assets since emergence from bankruptcy. We believe we will realize the
benefit of new net deferred tax assets in future periods and therefore have not recorded a valuation allowance on these new deferred tax assets.



Results of Operations



The following table sets forth, for the periods indicated, selected statements of operations data expressed as a percentage of net sales and the number of
stores open at the end of each period. Effective April 9, 2002, we emerged from Chapter 11 bankruptcy proceedings and implemented fresh-start accounting. Accordingly, all assets and liabilities were restated to reflect their respective fair values.
The consolidated financial statements after that date are those of a new reporting entity and are not comparable to pre-confirmation periods. However, for purposes of this discussion, the 43-weeks ended February 1, 2003 (Successor Company) has been
combined with the nine weeks ended April 6, 2002 (Predecessor Company) and then compared to the 52-weeks ended January 31, 2004 and the 52-weeks ended February 2, 2002. Differences between periods due to fresh-start accounting adjustments are
explained when necessary.



The lack of comparability in the
accompanying consolidated financial statements is most apparent in our capital costs (lease, interest, depreciation and amortization), as well as income taxes, debt restructuring and reorganization costs. The following table is included solely for
use in comparative analysis of results of operations and to complement managements discussion and analysis.



|                                             |  |                                |   |  |                                |   |  |                                |   |  |                                |   |  |                                |   
|-------------------------------------------- |  | ------------------------------ | - |  | ------------------------------ | - |  | ------------------------------ | - |  | ------------------------------ | - |  | ------------------------------ | --
|                                             |  | Successor 2003 Company         |   |  | Successor 2002 Company         |   |  | Predecessor 2002 Company       |   |  | Combined Fiscal2002            |   |  | Predecessor 2001 Company       |   
|                                             |  | 52-weeks endedJanuary 31, 2004 |   |  | 43-weeks endedFebruary 1, 2003 |   |  | Nine weeks  endedApril 6, 2002 |   |  | 52-weeks endedFebruary 1, 2003 |   |  | 52-weeks endedFebruary 2, 2003 |   
|Net sales                                    |  | 100.0                          | % |  | 100.0                          | % |  | 100.0                          | % |  | 100.0                          | % |  | 100.0                          | % 
|Cost of sales                                |  | 65.3                           |   |  | 65.9                           |   |  | 66.1                           |   |  | 66.0                           |   |  | 65.8                           |   
|                                             |  |                                |   |  |                                |   |  |                                |   |  |                                |   |  |                                |   
|Gross profit                                 |  | 34.7                           |   |  | 34.1                           |   |  | 33.9                           |   |  | 34.0                           |   |  | 34.2                           |   
|Selling, general and administrative expenses |  | 32.3                           |   |  | 30.1                           |   |  | 30.0                           |   |  | 30.0                           |   |  | 29.5                           |   
|Depreciation                                 |  | 0.9                            |   |  | 0.8                            |   |  | 2.5                            |   |  | 1.1                            |   |  | 3.0                            |   
|Reorganization items                         |  |                               |   |  |                               |   |  | (46.1                          | ) |  | (8.3                           | ) |  | 2.9                            |   
|Interest expense                             |  | 0.5                            |   |  | 0.7                            |   |  | 0.9                            |   |  | 0.8                            |   |  | 1.2                            |   
|                                             |  |                                |   |  |                                |   |  |                                |   |  |                                |   |  |                                |   
|Income (loss) before income tax expense      |  | 1.0                            |   |  | 2.5                            |   |  | 46.6                           |   |  | 10.4                           |   |  | (2.4                           | ) 
|Income tax expense (benefit)                 |  | 0.4                            |   |  | 1.1                            |   |  | (0.9                           | ) |  | 0.7                            |   |  |                               |   
|                                             |  |                                |   |  |                                |   |  |                                |   |  |                                |   |  |                                |   
|Net income (loss)                            |  | 0.6                            | % |  | 1.4                            | % |  | 47.5                           | % |  | 9.7                            | % |  | (2.4                           | )%
|                                             |  |                                |   |  |                                |   |  |                                |   |  |                                |   |  |                                |   
|Number of stores open at end of period       |  | 177                            |   |  | 171                            |   |  | 172                            |   |  | 171                            |   |  | 172                            |   



52-Weeks Ended January 31, 2004
(Fiscal 2003) Compared to 52-Weeks Ended February 1, 2003 (Combined Fiscal 2002)



Net Sales.    Net sales decreased $3.9 million, or 1.7%, to $222.6 million in Fiscal 2003 from $226.5 million in Combined Fiscal 2002. Fiscal 2003 net sales include 171 stores that were open
at the beginning of the year plus six stores opened during the second half of the fiscal year. The six new stores contributed $1.5 million in net sales and were the first new store openings in five years. Sales in the Basic Party and Seasonal
category experienced an overall increase in sales as we rolled out the expanded party initiative and offered a wider assortment of seasonal Halloween merchandise. However, the other five categories experienced a decrease in sales. Comparable store
sales decreased $4.5 million or 2.0%. Because of the timing of store openings in Fiscal 2003, the new stores were excluded from the calculation of comparable store sales. We include stores opened 13 or 14 months after their opening date in the
calculation of comparable store sales. Declines in sales were attributable to a highly competitive and promotional retail environment and the effect of a softening economy.



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Gross Profit.    Cost of sales includes merchandise, distribution and
occupancy costs. Gross profit increased $0.2 million, or 0.2%, to $77.3 million in Fiscal 2003 from $77.1 in Combined Fiscal 2002. The increase in Gross Profit is primarily due to an increase in the mark-on percentage of merchandise available for
sale and decrease in distribution costs of $0.3 million partially offset by declining sales volume and an increase in occupancy costs of $0.4 million. As a percentage of net sales, gross profit was 34.7% in Fiscal 2003 and 34.0% in Combined Fiscal
2002.



Selling, General and Administrative
Expenses.    Selling, general and administrative expenses include store payroll, advertising, and other store operating and corporate administrative expenses. Selling, general and administrative expenses increased $3.8
million, or 5.6%, to $71.9 million in Fiscal 2003 from $68.1 million in Combined Fiscal 2002. The increase is related to additional advertising expenses of $2.7 million as we attempted to drive sales in a difficult retail environment coupled with
$1.1 million increase in corporate administrative expenses related to higher insurance costs, the listing on NASDAQ, professional fees as well as additional staff to support the new store openings. As a percentage of net sales, selling, general and
administrative expenses increased to 32.3% in Fiscal 2003 from 30.0% in Combined Fiscal 2002.



Depreciation Expense.    Depreciation Expense was $2.0 million in Fiscal 2003 compared to $2.5 million in Combined Fiscal 2002. The decrease is primarily due to the fresh-start adjustment on
fixed assets of $11.8 million resulting from the write down of fixed assets for the excess of book value over enterprise value.



Reorganization Items.    We did not recognize any reorganization items in Fiscal 2003 compared to $18.8 million gain in
Combined Fiscal 2002. No reorganization items have been recorded since we emerged from bankruptcy in April 2002. See discussion of reorganization items related to Combined Fiscal 2002 in the following section.



Interest Expense.    Interest expense was $1.2
million in Fiscal 2003 compared to $1.7 million in Combined Fiscal 2002. This decrease resulted from decreased borrowing levels due to lower inventory purchases and in increase in vendor terms.



Income Taxes (Benefit).    We recognized income
tax expense of $0.9 million in Fiscal 2003 compared to income tax expense of $1.6 in Combined Fiscal 2002. Amounts booked after emergence from bankruptcy represent approximately 40% of pre-tax income for the period described. Due to the fact we are
able to use pre-emergence net operating losses, we did not pay federal income tax and the expense recorded in each period resulted, net of the impact of deferred taxes, in a direct increase to stockholders equity. Until the benefits of the net
operating loss carry forwards are fully utilized, we do not expect to pay federal income tax. We recognized an income tax benefit of $0.4 million for the nine weeks ended April 6, 2002 which resulted from the cash realization of net operating loss
carrybacks due to the enactment of the Job Creation and Workers Assistance Act of 2002.



52-Weeks Ended February 1, 2003 (Combined Fiscal 2002) Compared to 52-Weeks Ended February 2, 2002 (Fiscal 2001)



Net Sales.    Net sales decreased $1.4 million, or 0.6%, to $226.5 million in Combined Fiscal 2002 from $227.9 million in
Fiscal 2001. Net sales increases in the basic party and gift categories of 3.0% were offset by decreases in all other categories by 3.9%. Comparable store sales increased $0.8 million or 0.4%, which is indicative of a challenging retail environment.
No new stores opened in Combined Fiscal 2002 or Fiscal 2001 and one store closed in Combined Fiscal 2002. Three stores closed in Fiscal 2001. Closed stores sales are excluded from the calculation of comparable store sales in the fiscal month
of the store closing.



Gross
Profit.    Cost of sales includes merchandise, distribution and occupancy costs. Gross profit decreased $1.0 million, or 1.2%, to $77.1 million in Combined Fiscal 2002 from $78.1 million in Fiscal 2001. The decrease in Gross
Profit is primarily due to increases in distribution and occupancy costs of $1.7 million offset by an



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increase in the mark-on percentage on merchandise available for sale. As a percentage of net sales, gross profit was 34.0% in Combined Fiscal 2002 and 34.2%
in Fiscal 2001.



Selling, General and Administrative
Expenses.    Selling, general and administrative expenses include store payroll, advertising, and other store operating and corporate administrative expenses. Selling, general and administrative expenses increased $0.8
million, or 1.1%, to $68.1 million in Combined Fiscal 2002 from $67.3 million in Fiscal 2001. The increase is related to increases in store and advertising expenses of $1.0 million offset by decreases in administrative expenses of $0.2 million. As a
percentage of net sales, selling, general and administrative expenses increased to 30.0% in Combined Fiscal 2002 from 29.5% in Fiscal 2001.



Depreciation Expense.    Depreciation Expense was $2.5 million in Combined Fiscal 2002 compared to $6.8 million in Fiscal 2001.
The decrease is primarily due to the fresh-start adjustment on fixed assets of $11.8 million resulting from the write down of fixed assets for the excess of book value over enterprise value.



Reorganization Items.    Reorganization Items
fluctuated $25.5 million in Combined Fiscal 2002 from an expense of $6.7 million in Fiscal 2001 to a gain of $18.8 million for Combined Fiscal 2002. The fluctuation relates to the gain related to the discharge of indebtedness that resulted from the
forgiveness of certain liabilities and distribution of ownership in the Reorganized Company in accordance with our Plan of Reorganization offset by fresh-start adjustments. The major components of Reorganization Items are as follows:



|                                                            |  |                      |       |   |               |   |    
|----------------------------------------------------------- |  | -------------------- | ----- | - | ------------- | - | ---
|                                                            |  | Combined Fiscal 2002 |       |   | Fiscal 2001  
|Reorganization Items:                                       |  | (in millions)        |       |   | (in millions)
|Professional fees                                           |  | $                    | 1.4   |   |               | $ | 3.5
|Severance/retention bonus                                   |  |                      | 1.0   |   |               |   | 1.5
|Closed store expense                                        |  |                      | 0.3   |   |               |   | 0.8
|Fresh start adjustments                                     |  |                      | 10.4  |   |               |   |   
|Forgiveness of debt                                         |  |                      | (41.8 | ) |               |   |   
|Unsecured creditors ownership share in reorganized Company |  |                      | 9.6   |   |               |   |   
|Other                                                       |  |                      | 0.3   |   |               |   | 0.9
|                                                            |  |                      |       |   |               |   |    
|Total                                                       |  | $                    | (18.8 | ) |               | $ | 6.7
|                                                            |  |                      |       |   |               |   |    



The
Successor Company did not record any Reorganization Items.



Interest Expense.    Interest expense was $1.7 million in Combined Fiscal 2002 compared to $2.8 million in Fiscal 2001. This decrease resulted from decreased borrowing levels due to lower inventory purchases and
an increase in vendor terms coupled with lower effective interest rates.



Income Taxes (Benefit).    We recognized income tax expense of $2.0 million for the 43-weeks ended February 1, 2003 which results in an increase in stockholders equity due to our
ability to utilize pre-emergence net operating loss benefits. Until the benefits of the net operating loss carry forwards are fully utilized, we do not expect to pay federal income tax. We recognized an income tax benefit of $0.4 million for the
nine weeks ended April 6, 2002 which resulted from the cash realization of net operating loss carry backs due to the enactment of the Job Creation and Workers Assistance Act of 2002. We did not record any tax expense in Fiscal 2001 and fully
reserved for the net deferred tax assets that were accumulating because of the net operating losses.



Liquidity and Capital Resources



Our uses of capital for Fiscal 2004 are expected to include working capital for operating expenses and satisfaction of current liabilities, expenditures related to maintaining and refurbishing existing stores, opening new stores, the
required prepayment of the Trade Conversion Note and extended creditor payment and interest



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payments on outstanding borrowings. Historically, these cash requirements have been met through cash flow from operations and borrowings under our credit
facility.



The following table sets forth certain consolidated
statements of cash flows data:



|                                      |  |               |       |   |                     |   |       |  
|------------------------------------- |  | ------------- | ----- | - | ------------------- | - | ----- | -
|                                      |  | Fiscal 2003   |       |   | CombinedFiscal 2002 |  
|                                      |  | (in millions) |       |   | (in millions)       |  
|Cash provided by operating activities |  |               | $10.6 |   |                     | $ | 12.7  |  
|                                      |  |               |       |   |                     |   |       |  
|Cash used in investing activities     |  | $             | (2.7  | ) |                     | $ | (2.7  | )
|                                      |  |               |       |   |                     |   |       |  
|Cash used in financing activities     |  | $             | (7.9  | ) |                     | $ | (10.0 | )
|                                      |  |               |       |   |                     |   |       |  



At January 31, 2004
our working capital was $15.1 million. Net cash provided by operating activities in Fiscal 2003 was $10.6 million compared to $12.7 million of net cash provided by operating activities during Combined Fiscal 2002. The decrease is related to
fluctuations in inventory and accounts payable balances coupled with lower levels of operating income.



Net cash used in investing activities was $2.7 million in both Fiscal 2003 and Combined Fiscal 2002. Net cash used in investing activities was primarily
for capital expenditures for store remodeling, computer equipment, and warehouse equipment for the distribution center. Additionally, we used approximately $0.9 million for furniture and fixtures and leasehold improvements relating to the new store
openings in Fiscal 2003.



Net cash used in financing activities
in Fiscal 2003 was $7.9 million compared to $10.0 million used in financing activities in Combined Fiscal 2002. Amounts are attributable to the level of borrowings and repayments.



We are party to a secured financing facility, dated April 8, 2002, with Wells Fargo Retail Finance, LLC (as amended, the
Loan Agreement). The Loan Agreement, which is a line of credit expiring on April 8, 2007, currently provides up to $30 million, (including $10 million for letters of credit) to fund working capital needs and for general corporate
purposes. Borrowings under the facility are limited by a percent of inventory levels. At April 14, 2004, the interest rate on our borrowings was 4.0%. Borrowings under the Loan Agreement are secured by substantially all of our assets.



The Loan Agreement contains certain restrictive covenants, which, among other
things, require us to achieve specified operating results. The restrictive covenants also limit our capital expenditures, asset sales and dividends and our ability to grant liens and incur additional indebtedness.



Pursuant to the Plan of Reorganization, we converted $3.1 million of post
petition trade payables into a Trade Conversion Note, which will be payable within four years of the Effective Date. In addition, we recorded at fair value the $2.6 million extended creditor payment payable to the general unsecured creditors. We
intend to pay down the Trade Conversion Note within three years of the Effective Date.



In April 2003, we paid $0.2 million in interest to the Trade Participants of the Trade Conversion Notes. Additionally, on March 17, 2004, we elected to prepay, net of discount, a portion of the Trade Conversion Notes
and extended creditor payment. The payment made on March 17, 2004 was $1.1 million.



Both the Trade Conversion Note and extended creditor payment are subject to prepayment provisions if our average excess availability on the Loan Agreement exceeds $12 million during the prior fiscal year. In such
event, 40% of the excess availability greater than $12 million shall be paid, subject to certain maximum payment amounts, on a pro rata basis to the Trade Conversion Note holders and general unsecured creditors related to the extended creditor
payable. Based upon our average excess availability during Fiscal 2003, we are subject to the maximum prepayment amount of $0.7 million, which is due May 31, 2004.



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As of January 31, 2004, we had $9.8 million in borrowings outstanding under the Loan Agreement and had
utilized approximately $1.4 million to issue letters of credit.



We do not intend to pay cash dividends in the foreseeable future and under our current Loan Agreement we are restricted from paying dividends on our capital stock.



Our ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, indebtedness or to fund
planned capital expenditures, will depend upon future performance, which, in turn, is subject to general economic, financial, competitive and other factors that are beyond our control. Based upon our current level of operations and anticipated
growth, we believe that future cash flows from operations, together with available borrowings under the Loan Agreement, will be adequate for the next twelve months to meet anticipated requirements for capital expenditures, working capital, interest
payments and scheduled principal payments. There can be no assurance that our business will continue to generate sufficient cash flow from operations in the future to service our debt and make necessary capital expenditures after satisfying certain
liabilities arising in the ordinary course of business. If unable to do so, we may be required to refinance all or a portion of our existing debt, sell assets or obtain additional financing. There can be no assurance that any refinancing would be
available or that any sales of assets or additional financing could be obtained.



Contractual Obligations



As discussed in Note
4 Summary of Significant Accounting Polices in the Notes to the Consolidated Financial Statements, we conduct substantially all of our activities using leased premises. Store and office leases generally provide that real estate taxes,
insurance, common area maintenance, and operating expenses are our obligations. Certain store leases also provide for contingent rentals based on sales in excess of specified minimums.



The approximate cost of fixed assets held under capital leases included in fixed assets was $1.1 million at January 31, 2004
and February 1, 2003. Accumulated depreciation related to such fixed assets was approximately $0.4 million and $0.2 million at January 31, 2004 and February 1, 2003, respectively. Fixed assets held under capital leases consist primarily of
technology, office and warehouse equipment.



To facilitate an
understanding of our contractual obligations, the following data is provided which summarizes future payments:



|               |  |                                                  |      |                       |   |                                                                 |  |   |     
|-------------- |  | ------------------------------------------------ | ---- | --------------------- | - | --------------------------------------------------------------- |  | - | ----
|               |  | Debt & Capital Leases (including currentportion) |      | Operating Leases      |   | Inventory Purchase Commitments  including open purchase orders
|               |  | (amounts in millions)                            |      | (amounts in millions) |   | (amounts in millions)                                          
|Fiscal year:   |  |                                                  |      |                       |   |                                                                 |  |   |     
|2004           |  | $                                                | 12.1 |                       | $ | 26.2                                                            |  | $ | 17.1
|2005           |  |                                                  | 4.0  |                       |   | 23.3                                                            |  |   | 2.1 
|2006           |  |                                                  |     |                       |   | 19.4                                                            |  |   | 0.5 
|2007           |  |                                                  |     |                       |   | 14.4                                                            |  |   |    
|Thereafter     |  |                                                  |     |                       |   | 16.3                                                            |  |   |    
|               |  |                                                  |      |                       |   |                                                                 |  |   |     
|Total payments |  | $                                                | 16.1 |                       | $ | 99.6                                                            |  | $ | 19.7
|               |  |                                                  |      |                       |   |                                                                 |  |   |     



Included in Fiscal
Year 2004 Debt & Capital Leases is the $9.8 million in borrowings outstanding under the Loan Agreement at January 31, 2004.



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Off-Balance Sheet Arrangements



We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purposes of raising
capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity
or the availability of capital resources.



New Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS) No. 142 Goodwill and Other Intangible Assets, which establishes financial accounting and reporting for acquired goodwill and other intangible assets
and supercedes Accounting Principles Board Opinion (APB) No. 17, Intangible Assets. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. As we do not have goodwill or intangible
assets recorded in the financial statements, the adoption of SFAS No. 142 during the first quarter of Fiscal 2002 did not have an impact on our consolidated financial position or results of operations.



In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. We have adopted the provisions of SFAS No. 143 and it did not have a material impact on our
consolidated financial position or results of operations.



In
August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, although it retains many of the fundamental provisions of that Statement. The provisions of SFAS No. 144 are effective for fiscal years
beginning after December 15, 2001, thereby applying to Fiscal 2002. In conjunction with fresh-start reporting, we recorded a $11,760 adjustment to fixed assets to reflect the excess of book value over enterprise value. We have adopted the provisions
of SFAS No. 144 and it did not have a material impact on our consolidated financial position or results of operations.



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Specifically, SFAS 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, an amendment of APB Opinion No. 30 and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements, as these two standards required that all gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item. Consequently, such gains and losses will now be classified as
extraordinary only if they meet the criteria for extraordinary treatment set forth in APB Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS No. 145 also rescinds SFAS No. 44 Accounting for Intangible Assets of Motor Carriers, an amendment of Chapter 5 of ARB No. 43 and an interpretation of APB Opinions 17 and 30,
because the event to which that Statement relates is no longer relevant. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to require that certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as such transactions, and also makes certain technical corrections to a number of existing pronouncements. We were required to adopt this statement due to the application of fresh-start accounting.
The effect of this statement on us is that the net gain associated with the plan of reorganization and fresh-start adjustments are reported as a component of operations in the nine weeks ended April 6, 2002.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement changes the timing of recognition for certain exit costs associated with restructuring



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activities, so that certain exit costs would be recognized over the period in which the restructuring activities occur. Currently, exit costs are recognized
when we commit to a restructuring plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002 and could result in us recognizing the cost of future restructuring activities over a period of time as opposed to as
a single event. There were no exit activities in Fiscal 2003.



In September 2002, the Emerging Issues Task Force (EITF) issued 02-16 Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor which addresses the accounting for cash retailers
receive from vendors. The EITF concluded cash received from a vendor is presumed to be a reduction of purchase price of goods unless the vendor receives an identifiable benefit or there is reimbursement of a specific incremental identifiable cost.
Additionally, rebates are to be recorded when it is probable and reasonably estimable and allocated to transactions giving rise to the rebate. Our accounting policies relating to cash received from vendors are consistent with the conclusions reached
by the EITF.



In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements of Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires the recognition of a liability for certain
guarantee obligations issued or modified after December 31, 2002. FIN 45 also clarifies disclosure requirements to be made by a guarantor of certain guarantees. The disclosure provisions of FIN 45 were effective for fiscal years ending after
December 15, 2002. We adopted the disclosure provisions and the accounting requirements of FIN 45 as of February 1, 2003 and it did not have an impact of our consolidated financial position or results of operations.



In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement 123. SFAS No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation and provides alternative methods for accounting
for a change by registrants to the fair value method of accounting for stock-based compensation. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosure in the significant accounting policy footnote of
both the annual and interim financial statements of the method of accounting for stock-based compensation and the related pro-forma disclosures when the intrinsic value method continues to be used. SFAS No. 148 is effective for fiscal years ended
after December 15, 2002, and disclosures are effective for the first quarter beginning after December 15, 2002. We have adopted the disclosure provisions of SFAS No. 148.



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46). FIN 46 addresses how to identify variable interest entities and provides guidance as to how a company may assess its interest in a variable interest entity for purposes of deciding whether consolidation of that entity is
required. FIN 46 is effective for all variable interest entities created after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim period or
annual period beginning after June 15, 2003. However, in October 2003, the FASB deferred the effective date of FIN 46 to the end of the first interim or annual period ending after December 15, 2003 for those arrangements involving special purpose
entities entered into prior to February 1, 2003. All other arrangements with the scope of FIN 46 are subject to its provisions beginning in 2004. Additionally the FASB issued Interpretation No. 46R, Consolidation of Variable Interest
EntitiesA Modification of FASB Interpretation No. 46, which amends Interpretation No. 46. As we do not have any interests in a variable interest entity, the adoption of this provision did not have an impact on our consolidated financial
position or results of operations.



In April 2003, the FASB
issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement is effective for contracts entered
into or modified after June 30, 2003. As we have not entered into any such agreements after June 30, 2003, the adoption of this provision did not have an impact on our consolidated financial position or results of operations.



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In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As we have not issued any financial instruments which meet this criteria, the adoption of
this provision did not have an impact on our consolidated financial position or results of operations.



In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits to
improve financial statement disclosures for defined benefit plans. SFAS 132 requires more detailed disclosures about plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The disclosures are generally effective
for fiscal years ending after December 31, 2003. As we do not offer Pension and Other Postretirement Benefits as described under SFAS 132, the adoption of this provision did not have an impact on our consolidated financial position or results of
operations.



Trends, Risks And Uncertainties



In addition to other matters identified or described by us from time to time
in filings with the Securities and Exchange Commission, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are
reflected from time to time in any forward-looking statement that may be made by us or on our behalf. Some of these important factors, but not necessarily all of the important factors, are as follows:



Intense competition in our industry could prevent us from increasing or sustaining our
revenues and prevent us from achieving or sustaining profitability.



The greeting card, party supply and special occasion retailing business is highly competitive. Increased competition by existing or future competitors may reduce our sales and cause us to incur a loss. As a result of
competition from other specialty party supplies and paper goods retailers, we may need to incur additional marketing and promotional expenses to achieve sales growth in our existing stores. Our stores compete with a variety of smaller and larger
retailers, including:



| |  |  | specialty party supplies and paper goods retailers, including other party superstores;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | card shops and designated departments in mass merchandisers;
| | - |  | ------------------------------------------------------------



| |  |  | warehouse/merchandise clubs and discount general merchandise chains;
| | - |  | --------------------------------------------------------------------



| |  |  | toy stores;
| | - |  | -----------



| |  |  | drug stores;
| | - |  | ------------



| |  |  | supermarkets;
| | - |  | -------------



| |  |  | dollar stores;
| | - |  | --------------



| |  |  | department stores of local, regional and national chains; and
| | - |  | -------------------------------------------------------------



| |  |  | internet retailers.
| | - |  | -------------------



Many of our competitors have substantially greater financial and personnel resources than we do. Some of our competitors have been, or may be, funded by
certain members of the vendor community. We may encounter additional competition from new entrants in the future in our existing markets. Our competitors may be able to respond more quickly or adjust prices more effectively to take advantage of new
opportunities or customer requirements. Increased competition could result in pricing pressures, reduced sales, reduced margins or failure to achieve or maintain widespread market acceptance, any of which could prevent us from increasing or
sustaining our revenues and achieving or sustaining profitability.



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Customers requirements are likely to evolve, and we will not retain customers or attract new customers if we do
not anticipate and meet specific customer requirements and changes in merchandising trends.



Our core operations rely on a stable customer base. Failure to maintain existing customers and obtain new customers will adversely affect our market
position.



Our success depends, in part, on our ability to
anticipate and respond to changing merchandise trends and consumer demands in a timely manner. Accordingly, any delay or failure by us in identifying and responding to emerging trends could adversely affect consumer acceptance of the merchandise in
our stores. If we are required to sell a significant amount of unsold inventory at below average mark-ups over our cost or below cost, such action could have an adverse effect on our financial condition and results of operations.



We make merchandising decisions well in advance of the seasons during which
we will sell the merchandise. As a result, if we fail to identify and respond quickly to emerging trends, consumer acceptance of the merchandise in our stores could diminish and we may experience a reduction in revenues. We sell certain licensed
products that are in great demand for short time periods, making it difficult to project our inventory needs for these products. Significantly greater or less-than-projected product demand could lead to one or more of the following:



| |  |  | lost sales due to insufficient inventory;
| | - |  | -----------------------------------------



| |  |  | higher carrying costs associated with slower turning inventory; and
| | - |  | -------------------------------------------------------------------



| |  |  | reduced or eliminated margins due to mark downs on excess inventory.
| | - |  | --------------------------------------------------------------------



If consumer demand for single-use, disposable party goods were to diminish, the party supplies and paper goods industry and our revenues would be
negatively affected. For example, if cost increases in raw materials such as paper, plastic, cardboard or petroleum were to cause our prices to increase significantly, consumers might decide to forgo the convenience associated with single-use,
disposable products. Similarly, changes in consumer preferences away from disposable products and in favor of reusable products for environmental or other reasons could reduce the demand for our products.



A continued downturn in the economy may affect consumer purchases of discretionary items,
which could reduce our sales.



In general, our sales
represent discretionary spending by our customers. Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, the availability of consumer credit, taxation and consumer confidence in
future economic conditions. Our customers purchases of discretionary items, including our products, could decline during periods when disposable income is lower or during periods of actual or perceived unfavorable economic conditions. If this
occurs, our revenues and profitability will decline. In addition, our sales could be adversely affected by a continued downturn in the economic conditions of the markets in which we operate.



Our business depends on continued good relations with our suppliers.



Our failure to maintain good relationships with our principal suppliers or
the loss of our principal suppliers would hurt our business. We purchase our inventory from more than 300 vendors world-wide, with the largest supplier representing approximately 20% and the ten largest suppliers representing approximately 47% of
our aggregate purchases in Fiscal 2003. Many of our principal suppliers currently provide us with incentives like volume purchasing allowances and trade discounts. If our suppliers were to reduce or discontinue these incentives, prices from our
suppliers would increase and our profitability would be reduced. As is customary in our industry, we generally do not have long-term contracts with any suppliers and any supplier could discontinue selling to us at any time; however, pursuant to our
bankruptcy plan of reorganization, we entered into agreements with certain of our trade vendors to provide us with competitive trade terms, including, extended credit limits,



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extended payment terms and seasonal advances. While we are not aware of any reasons to question the operational or financial ability of such vendors either
to ship or provide such terms, the inability of any of such vendors to do so could adversely affect our competitive financial performance. Our arrangements with overseas suppliers are subject to risks of doing business abroad, such as import duties,
trade restrictions, work stoppages, political instability and other factors which could have an adverse effect on our business.



We may need to raise additional capital to fund our operations and support our long-term growth strategy.



Our ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance, indebtedness or to fund planned capital expenditures, will depend upon our future performance, which, in turn, is subject to general economic, financial, competitive and other factors that are beyond our control. Based
upon our current level of operations and anticipated growth, we believe that future cash flow from operations, together with available borrowings under our new financing facility, will be adequate to meet our anticipated requirements for capital
expenditures, working capital, interest payments and scheduled principal payments. There can be no assurance that our business will continue to generate sufficient cash flow from operations in the future to service our debt and make necessary
capital expenditures after satisfying certain liabilities arising in the ordinary course of business. If unable to do so, we may be required to refinance all or a portion of our existing debt, sell assets or obtain additional financing. There can be
no assurance that any refinancing would be available or available on favorable terms or that any sales of assets or additional financing could be obtained or obtained on favorable terms. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop or enhance our products and services, implement our long-term growth strategy, take advantage of future opportunities or respond in a timely manner to competitive pressures.



We are substantially leveraged and our financing facility contains covenants that could
adversely affect our business.



Our indebtedness restricts
our ability to obtain additional financing in the future and, because we may be more leveraged than some of our competitors, may place us at a competitive disadvantage. Also, the financing facility that we entered into as part of our emergence from
bankruptcy contains covenants that impose operating and financial restrictions on us. These covenants could adversely affect our ability to finance future operations, potential acquisitions or capital needs or to engage in other business activities
that may be in our best interest.



The seasonal nature of our business could
adversely impact our operations.



Our business is highly
seasonal, with operating results varying from quarter to quarter. We have historically experienced higher sales during the second and fourth quarters primarily due to increased demand by customers for our products attributable to special occasions
and holiday seasons during these periods. Lower sales than expected by us during these periods, a lack of availability of product, or a general economic downturn in sales could have a material adverse effect on our business, financial condition and
results of operations for the full year. In addition, the timing of new store openings, related pre-opening expenses and the amount of revenue contributed by new and existing stores may cause our quarterly results of operations to fluctuate. Any or
all of these factors could also cause the price of our Common Stock to decline.



We may not be able to profitably grow our business.



In order to profitably grow our business, we need to increase sales in our existing markets and open additional stores. Opening additional stores in existing markets could reduce sales from our stores located in or near those markets and
stores opened in new markets may not be profitable. In addition, the opening of new stores could put additional strain on our existing infrastructure and may limit our ability to effectively leverage our fixed cost.



21



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##### Table of Contents

We may not be able to effectively execute our long-term growth strategy.



Our long-term growth strategy requires effective planning and management.
Once a new geographic market is identified, we must obtain suitable store sites on acceptable terms. Also, the competitive and merchandising challenges we face in new geographic markets may be different from the challenges we face in our existing
geographic markets. We may have to adapt to regional tastes and customs and compete against established and familiar local businesses with innovative or unique techniques for marketing party supplies and paper goods. Entering new markets may also
place significant demands on our management, financial controls, operations and information systems. This may cause us to incur higher costs relating to marketing and operations. Expansion will require an increase in our personnel, particularly
store managers and sales associates, to operate our new stores.



Higher
administrative expenses could adversely affect our business and operations.



Higher selling, general and administrative expenses occasioned by the potential need for additional advertising, marketing, administrative or management information systems expenditures could negatively impact our
business and operations.



Adverse publicity could adversely affect our
business.



We generally operate in medium sized towns and
suburban neighborhoods. Adverse publicity or news coverage relating to us could negatively impact our efforts to establish and promote name recognition and a positive image.



If we do not comply with the numerous laws and regulations that govern our business, our business could be harmed.



Each of our stores must comply with regulations adopted by Federal agencies
and with licensing and other regulations enforced by state and local health, sanitation, safety, fire and other departments. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental
factors, and difficulties or failures in obtaining the required licenses or approvals, can delay and sometimes prevent, the opening of a new store. In addition, we comply with the Fair Labor Standards Act and various state laws governing various
matters such as minimum wage, overtime and other working conditions. We also comply with the provisions of the Americans with Disabilities Act of 1990, as amended, which requires generally that employers provide reasonable accommodation for
employees with disabilities and that stores be accessible to customers with disabilities. We believe that the procedures currently in effect at our stores are in general compliance with such laws and regulations. However, future violations of such
laws, the enactment of stricter laws or regulations or the implementation of more aggressive enforcement policies could adversely affect our operations or financial condition.



If we are unable to hire additional qualified personnel or retain existing personnel, we may not be able to operate our business
successfully.



Our success depends upon the efforts of our
senior management and other key personnel. The loss of the services of any member of our management team or a key employee, or a failure to timely retain a replacement officer could have a material adverse effect on us. Our future success will also
depend in part on attracting and retaining quality employees. Many of our employees are in entry level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling costs is subject to
external factors, such as unemployment levels, minimum wage legislation and changing demographics. There can be no assurance that we will be successful in retaining our existing key personnel or in attracting and retaining additional employees we
may require. Any difficulties in obtaining, retaining and training qualified personnel could have a material adverse effect on us.



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Interruption or obsolescence of our management information systems could have a negative effect on our competitive
ability and our business generally.



We believe that our
management information systems are an important factor in supporting our business and enhancing our competitive position in the industry. Over the past three years, we have invested significant resources in systems and infrastructure to support our
business and make it more efficient. We use a management information and control system, which is based on the JDA Merchandise Management System software package (JDA) and supports the complete range of retail cycle functions in the
areas of finance, merchandising and distribution. All stores are linked to our headquarters through personal computers, which interface with an IBM AS/400 and provide auto-replenishment of inventory and the ability to enter payroll information and
send and receive electronic mail. These personal computers are also tied into our point-of-sale system (POS system). The POS system provides sales information to our stores and central office and is used to enhance merchandise planning
and buying programs. Any obsolescence or continuing interruption in the functioning of these systems could have a negative effect on our ability to compete effectively in the industry and on our business.



Our Trade Conversion Notes, warrants and stock options may have significant dilutive
effects on holders of Common Stock generally.



In
connection with our bankruptcy plan of reorganization, we issued Trade Conversion Notes in an aggregate amount equal to $3.13 million to certain of our trade creditors which will be payable on the fourth anniversary of April 9, 2002. The Trade
Conversion Notes are convertible at the option of the holders into an aggregate of up to 29.35% of our Common Stock outstanding (including for such calculation Common Stock, warrants and options issued pursuant to our bankruptcy plan and assuming
the conversion of all such Trade Conversion Notes) at any time between April 9, 2005 and April 9, 2006, subject to adjustments to reflect any prepayments made by us. Although we currently intend to and anticipate paying such notes, failure to meet
our projected financial performance could prevent us from making such payments in which event then-existing holders of common stock may be significantly diluted by a conversion of the Trade Conversion Notes. In April 2003, we made an interest
payment of $188 to the Trade Participants of the Trade Conversion Notes. Additionally, we made a $1.0 million prepayment, net of discount, to one of the Trade Participants on March 17, 2004. These prepayments reduced the percentage of Common Stock
that can be converted into our Common Stock outstanding to 21.1%.



Pursuant to our bankruptcy plan of reorganization, we also issued four series of warrants to holders of our old pre-bankruptcy common stock to purchase up to approximately 10% (subject to certain dilution events) of the Common Stock issued
under the bankruptcy plan (assuming exercise of all such warrants). These four series of warrants are exercisable for terms ranging from four to eight years.



We currently have stock option plans pursuant to which we have the authority to issue options to our employees and directors for up to 1,133,334 shares of
our Common Stock. As of April 14, 2004, there were options issued to purchase 702,150 shares of our Common Stock outstanding with a weighted average exercise price of $4.55 per share.



The issuance of shares of Common Stock pursuant to the conversion of the Trade Conversion Notes, the exercise of the four
series of warrants, the exercise of stock options, and the antidilution rights protection of the warrants issued to management could significantly dilute the holders of Common Stock currently issued and outstanding.



Certain provisions of our charter may prevent or delay a change of control of the Company.



Our certificate of incorporation provides for a
classified Board of Directors. Any effort to obtain control of our Board of Directors by causing the election of a majority of the board of directors may require more time than would be required without a staggered election structure. Our
certificate of incorporation also imposes restrictions on the direct or indirect transferability of our Common Stock, subject to certain exceptions, such that



23



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##### Table of Contents

no person or certain groups of persons (x) may acquire or accumulate five percent (5%) or more (as determined under tax law principles governing the
application of Section 382 of the Internal Revenue Code of 1986, as amended) of the Common Stock or (y) who, upon implementation of the Plan, owns 5% or more of the Common Stock, may acquire additional Common Stock. These provisions would have the
effect of preventing a change of control for the duration of such restrictions.



It is difficult to compare post-emergence financial information with that of prior periods.



Since we emerged from bankruptcy on April 9, 2002, there is limited operating and financial data available from which to analyze our operating results and
cash flow. As a result of fresh-start reporting, it is difficult to compare information reflecting our results of operations and financial condition after our emergence from bankruptcy to the results of prior periods. See Selected Financial
Data.



Our stock price may be volatile and could decline.



Since the effective date of our bankruptcy restructuring,
our Common Stock has had limited trading activity. We cannot predict the extent to which investor interest in our stock will lead to the development of a more active trading market, how liquid that market might become or whether it will be
sustained. The trading price of our Common Stock could be subject to wide fluctuations due to the factors discussed in this risk factors section and elsewhere in this document, including:



| |  |  | our operating results failing to meet the expectations of our investors;
| | - |  | ------------------------------------------------------------------------



| |  |  | material announcements by us or our competitors;
| | - |  | ------------------------------------------------



| |  |  | governmental regulatory action; or
| | - |  | ----------------------------------



| |  |  | adverse changes in general market conditions or economic trends.
| | - |  | ----------------------------------------------------------------



In addition, the stock markets in general have experienced extreme price and volume fluctuations. These broad market and industry factors may decrease the
market price of our Common Stock, regardless of our actual operating performance.



We do not anticipate paying dividends.



We
have not paid dividends on our Common Stock and we do not anticipate paying dividends in the foreseeable future. We intend to retain future earnings, if any, to finance the expansion of our operations and for general corporate purposes, including
future acquisitions. In addition, our financing facility prohibits us from paying dividends on our capital stock.



ITEM 7A.    
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS



We are subject to market risks from changes in interest rates. The interest rate on our revolving credit facilities, which represents a significant portion of our outstanding debt, is variable based upon the prime
rate or LIBOR. A hypothetical 10 percent increase to the average interest rate under the credit facilities applied to the average outstanding balance during the 52-week week period ended January 31, 2004 would not have had a material impact on our
financial position or results of operations.



ITEM
8.    
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The response to this item is submitted as a separate section of this Report commencing on page F-1 and is incorporated by reference.



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##### Table of Contents

|ITEM 9. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- |  | ------------------------------------------------------------------------------------



Previously disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2002.



ITEM 9A.    
CONTROLS AND PROCEDURES



As
required by Rule 13a-15(b), our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures
as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
As required by Rule 13a-15(d), our management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the
fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based upon that evaluation, there has been no such change during the fourth fiscal quarter.



It should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future
events.



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##### Table of Contents

PART III



Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, portions of the information required by Part III of Form 10-K are incorporated by
reference from our Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2004 Annual Meeting of Stockholders (the Proxy Statement).



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Information concerning directors, including our audit committee financial expert, appears in our Proxy Statement under Election of Directors.
This portion of the Proxy Statement is incorporated herein by reference.



Information concerning Executive Officers appears in our Proxy Statement under Management. This portion of the Proxy Statement is incorporated herein by reference.



Information concerning Section 16(a) beneficial ownership reporting
compliance appears in our Proxy Statement under Security Ownership of Certain Beneficial Owners and Management. This portion of the Proxy Statement is incorporated herein by reference.



We have adopted the Standards of Business Conduct, a code of ethics with
which every person who works for us is expected to comply. For anyone that would like to receive a copy of our Standards of Business Conduct please contact our Corporate Secretary at: Factory Card & Party Outlet Corp., 2727 Diehl Road,
Naperville, Illinois 60563. If any substantive amendments are made to the Standards of Business Conduct or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer or Chief Financial Officer, we
will disclose the nature of such amendment or waiver in a report on Form 8-K.



ITEM 11.    EXECUTIVE COMPENSATION



Information concerning executive compensation appears in our Proxy Statement under Executive Compensation and Related Information. This portion of the Proxy Statement is incorporated herein by reference.



|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- |  | ----------------------------------------------------------------------------------------------



Information concerning the security ownership of certain beneficial owners and management and related stockholder matters appears on our Proxy Statement
under Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information. This portion of the Proxy Statement is incorporated herein by reference.



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information appearing in our Proxy Statement under the heading Certain Relationships and Related Transactions is incorporated herein by
reference.



ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES



Information concerning principal accounting fees and services and the audit committees preapproval

policies and procedures appear in our Proxy Statement under the heading Fees Paid to Independent Auditors for Fiscal 2003 and 2002 and is incorporated herein
by reference.



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##### Table of Contents

PART IV



ITEM 15.    
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



(a) List of Documents filed as part of this Report on Form 10-K.



1. The following financial statements are filed as a separate section of this Report commencing on page F-1.



Independent Auditors Reports



Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003



Consolidated Statements of Operations for the 52-weeks ended
January 31, 2004, the 43-weeks ended February 1, 2003 (Successor Company), the nine weeks ended April 6, 2002 and the 52-weeks ended February 2, 2002 (Predecessor Company)



Consolidated Statements of Stockholders Equity (Deficit) for the 52-weeks ended January 31, 2004, the 43-weeks ended
February 1, 2003 (Successor Company), the nine weeks ended April 6, 2002 and the 52-weeks ended February 2, 2002 (Predecessor Company)



Consolidated Statements of Cash Flows for the 52-weeks ended January 31, 2004, the 43-weeks ended February 1, 2003 (Successor Company), the nine weeks
ended April 6, 2002 and the 52-weeks ended February 2, 2002 (Predecessor Company)



Notes to Consolidated Financial Statements



2. Financial Statement Schedules



The following financial statement schedule is filed as a separate section of this Report commencing on page S-1.



Independent Auditors Report



Condensed Financial Information of Factory Card & Party Outlet Corp.Balance Sheets as of January 31, 2004 and February 1, 2003 (Successor
Company)



Condensed Financial Information of Factory Card
& Party Outlet Corp.Statements of Operations for the 52-weeks ended January 31, 2004, the 43-weeks ended February 1, 2003 (Successor Company), the nine weeks ended April 6, 2002 and the 52-weeks ended February 2, 2002 (Predecessor Company)



Condensed Financial Information of Factory Card & Party
Outlet Corp.Statements of Cash Flows for the 52-weeks ended January 31, 2004, the 43-weeks ended February 1, 2003 (Successor Company), the nine weeks ended April 6, 2002 and the 52-weeks ended February 2, 2002 (Predecessor Company)



Notes to Condensed Financial Information of Factory Card & Party
Outlet Corp.



3. Exhibits.



The exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this Annual Report on Form 10-K.



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##### Table of Contents

|           |     |  |                                                                                                                                                                                                                                                                                                                    
|---------- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |     |  | Description                                                                                                                                                                                                                                                                                                        
|           |    
|2.1        | (1) |  | Debtors Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated February 5, 2002.                                                                                                                                                                                                     
|           |    
|3.1        | (2) |  | Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp.                                                                                                                                                                                                                             
|           |    
|3.11       |     |  | Amendment to the Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp. dated July 17, 2003.                                                                                                                                                                                       
|           |    
|3.12       |     |  | Amendment to the Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp. dated April 6, 2004.                                                                                                                                                                                       
|           |    
|3.2        | (2) |  | Bylaws of Factory Card & Party Outlet Corp.                                                                                                                                                                                                                                                                        
|           |    
|4.1        | (2) |  | Warrant Agreement, dated April 9, 2002, between Factory Card & Party Outlet and Wells Fargo Bank Minnesota, N.A.                                                                                                                                                                                                   
|           |    
|4.2        | (2) |  | Form of New Management Warrant, dated April 9, 2002.                                                                                                                                                                                                                                                               
|           |    
|4.3        | (2) |  | Schedule of New Management Warrants (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                       
|           |    
|4.4        | (2) |  | Trade Conversion Note of Factory Card & Party Outlet Corp. and Factory Card Outlet of America Ltd., dated April 9, 2002, for the benefit of CSS Industries, Inc.                                                                                                                                                   
|           |    
|4.5        | (2) |  | Schedule of Trade Conversion Notes (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                        
|           |    
|4.6        | (2) |  | Trade Conversion Agreement, dated as of April 9, 2002, among Factory Card & Party Outlet Corp., Factory Card Outlet of America, Ltd., Amscan, Inc., Creative Expressions Group, Inc.,
Images and Editions Limited, Unique Industries, Inc., CSS Industries, Inc., P.S. Greetings, Inc., and Maryland Plastics, Inc.
|           |    
|10.1       | (2) |  | Loan and Security Agreement dated as of April 9, 2002, among Factory Card Outlet of America, Ltd., as borrower, the lenders thereto as Wells Fargo Retail Finance, LLC, as arranger, collateral
agent and administrative agent.                                                                                    
|           |    
|10.2       |     |  | First Amendment dated April 9, 2004, to the Loan and Security Agreement, amoung Factory Card Outlet of America, Ltd., as borrower, the lenders thereto as Well Fargo Retail Finance, LLC, as
arranger, collateral agent and administrative agent.                                                                  
|           |    
|10.3       | (2) |  | Security Agreement, dated April 9, 2002, among Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd., in favor of William Kaye, as Collateral
Trustee.                                                                                                                                        
|           |    
|10.4       | (2) |  | Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.                                                                                                                                                                                                                                                       
|           |    
|10.5       | (2) |  | Trade Vendor Supply Agreement, dated April 9, 2002, between Factory Card & Party Outlet Corp., Factory Card Outlet of America, Ltd. and Maryland Plastics.                                                                                                                                                         
|           |    
|10.6       | (2) |  | Schedule of Trade Vendor Supply Agreements (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                
|           |    
|10.7       | (2) |  | Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd. and James D. Constantine.                                                                                                                                                                                            
|           |    
|10.8       | (2) |  | Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd. and Timothy F. Gower.                                                                                                                                                                                                
|           |    
|10.9       | (2) |  | Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd. and Gary W. Rada.                                                                                                                                                                                                    
|           |    
|10.10      | (3) |  | Factory Card & Party Outlet Corp. 2002 Non-Employee Directors Stock Option Plan.                                                                                                                                                                                                                                   
|           |    
|10.11      | (3) |  | First Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.                                                                                                                                                                                                                                



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##### Table of Contents

|      |     |  |                                                                                                         
|----- | --- |  | --------------------------------------------------------------------------------------------------------
|10.12 | (3) |  | Second Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Option Plan.                       
|      |    
|10.13 | (4) |  | Factory Card & Party Outlet Corp. 2003 Equity Incentive Plan.                                           
|      |    
|10.14 | (4) |  | Amended Bylaws of Factory Card & Party Outlet Corp.                                                     
|      |    
|21    |     |  | Subsidiaries of the Company                                                                             
|      |    
|23.1  |     |  | Consent of KPMG LLP                                                                                     
|      |    
|23.2  |     |  | Consent of Deloitte & Touche LLP                                                                        
|      |    
|31.1  |     |  | Chief Executive Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002               
|      |    
|31.2  |     |  | Chief Financial Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002               
|      |    
|32.1  |     |  | Chief Executive Officer Certification of Periodic Report under Section 906 of Sarbanes-Oxley Act of 2002
|      |    
|32.2  |     |  | Chief Financial Officer Certification of Periodic Report under Section 906 of Sarbanes-Oxley Act of 2002

---

Notes

|(1) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on March 25, 2002.
|--- |  | -------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on April 23, 2002.
|--- |  | -------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to the Companys Current Report on Form 10-Q as filed on June 18, 2002.
|--- |  | -------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference to the Companys Current Report on Form 10-K as filed on May 2, 2003.
|--- |  | -----------------------------------------------------------------------------------------------



(b) Reports on Form 8-K.



A Report on Form 8-K was filed on January 9, 2004. The report contained information announcing the Companys sales results for two months ended
January 3, 2004.



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##### Table of Contents

SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.



FACTORY CARD & PARTY OUTLET
CORP.By:

/s/    GARY W. RADAGary W. Rada President and Chief Executive Officer




Dated: April 14, 2004



Pursuant to the requirements of the Securities Exchange Act
of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                                |  |                                                                                                    |  |               
|----------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | --------------
|Name                                            |  | Title                                                                                              |  | Date          
|                                                |  |                                                                                                   
|/s/    GARY W.
RADAGary W. Rada                 |  | President and Chief Executive Officer                                                              |  | April 14, 2004
|                                                |  |                                                                                                   
|/s/    JAMES D. CONSTANTINEJames D. Constantine |  | Executive Vice President and Chief Financial and Administrative Officer [Chief Accounting Officer] |  | April 14, 2004
|                                                |  |                                                                                                   
|/s/    RICHARD E.
GEORGERichard E.
George       |  | Non-Executive Chairman of the Board                                                                |  | April 14, 2004
|                                                |  |                                                                                                   
|/s/    JOHN G. BRIMJohn G. Brim                 |  | Director                                                                                           |  | April 14, 2004
|                                                |  |                                                                                                   
|/s/    BEN EVANSBen Evans                       |  | Director                                                                                           |  | April 14, 2004
|                                                |  |                                                                                                   
|/s/    PETER MICHAEL HOLMESPeter Michael Holmes |  | Director                                                                                           |  | April 14, 2004
|                                                |  |                                                                                                   
|/s/    MARTIN G.
MANDMartin Mand                |  | Director                                                                                           |  | April 14, 2004
|                                                |  |                                                                                                   
|/s/    PATRICK
OBRIENPatrick
OBrien           |  | Director                                                                                           |  | April 14, 2004
|                                                |  |                                                                                                   
|/s/    ROBERT S.
SANDLERRobert S.
Sandler       |  | Director                                                                                           |  | April 14, 2004



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



|                                                                                                                                                                                                                                                             |  |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----
|                                                                                                                                                                                                                                                             |  | Page 
|                                                                                                                                                                                                                                                             | 
|Independent Auditors Reports                                                                                                                                                                                                                                |  | F-2,3
|                                                                                                                                                                                                                                                             | 
|Consolidated Balance Sheets as of January 31, 2004 (Successor Company) and February 1, 2003 (Successor Company)                                                                                                                                              |  | F-4  
|                                                                                                                                                                                                                                                             | 
|Consolidated Statements of Operations for the 52-weeks ended January 31, 2004, the 43-weeks ended February 1, 2003 (Successor Company), the nine weeks ended April 6, 2002 and the 52-weeks ended February 2, 2002
(Predecessor Company)                     |  | F-5  
|                                                                                                                                                                                                                                                             | 
|Consolidated Statements of Stockholders Equity (Deficit) for the 52-weeks ended January 31, 2004, the 43-weeks ended February 1, 2003 (Successor Company), the nine weeks ended April 6, 2002 and the 52-weeks ended February
2, 2002 (Predecessor Company) |  | F-6  
|                                                                                                                                                                                                                                                             | 
|Consolidated Statements of Cash Flows for the 52-weeks ended January 31, 2004, the 43-weeks ended February 1, 2003 (Successor Company), the nine weeks ended April 6, 2002 and the 52-weeks ended February 2, 2002 (Predecessor
Company)                     |  | F-7  
|                                                                                                                                                                                                                                                             | 
|Notes to Consolidated Financial Statements                                                                                                                                                                                                                   |  | F-8  



F-1



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##### Table of Contents

INDEPENDENT AUDITORS REPORT



To the Board of Directors and Stockholders of

Factory Card & Party Outlet Corp.

Naperville, Illinois



We have audited the accompanying consolidated balance sheets of Factory Card & Party Outlet Corp. and subsidiary as of January 31, 2004 and February
1, 2003 (Successor Company balance sheets), and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for the 52 weeks ended January 31, 2004, the 43 weeks ended February 1, 2003 (Successor Company
operations), and the nine weeks ended April 6, 2002 (Predecessor Company operations). Our audits also included the financial statement schedules listed in the index at item 15(a)(2) for the condensed balance sheets as of January 31, 2004 and
February 1, 2003 (Successor Company balance sheet), and the related condensed statements of operations and cash flows for the 52 weeks ended January 31, 2004, the 43 weeks ended February 1, 2003 (Successor Company operations), and the nine weeks
ended April 6, 2002 (Predecessor Company operations.) These financial statements and financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.



We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



As discussed in Note 1 to the consolidated financial statements, on March 20, 2002, the Bankruptcy Court entered an order confirming the plan of
reorganization which became effective after the close of business on April 8, 2002. Accordingly, the accompanying financial statements have been prepared in conformity with AICPA Statement of Position 90-7, Financial Reporting for Entities in
Reorganization Under the Bankruptcy Code, for the Successor Company as a new entity with assets, liabilities, and a capital structure having carrying values not comparable with prior periods as described in Note 2.



In our opinion, the Successor Company consolidated financial statements
present fairly, in all material respects, the financial position of Factory Card & Party Outlet Corp. and subsidiary as of January 31, 2004 and February 1, 2003, and the results of their operations and their cash flows for the 52 weeks ended
January 31, 2004 and the 43 weeks ended February 1, 2003, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Predecessor Company financial statements referred to above present
fairly, in all material respects, the results of their operations and their cash flows for the nine weeks ended April 6, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such
financial statement schedules for the condensed balance sheets as of January 31, 2004 and February 1, 2003 (Successor Company balance sheets) and the related condensed statements of operations and cash flows for the 52 weeks ended January 31,
2004, the 43 weeks ended February 1, 2003 (Successor Company operations) and the nine weeks ended April 6, 2002 (Predecessor Company operations), when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.



/s/    DELOITTE & TOUCHE LLP



Chicago, Illinois

April 5, 2004



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##### Table of Contents

INDEPENDENT AUDITORS REPORT



The Board of Directors and Stockholders

Factory Card & Party Outlet Corp.:



We have audited the accompanying consolidated statements of operations, stockholders deficit and cash flows of Factory Card & Party Outlet Corp.
(formerly know as Factory Card Outlet Corp.) and subsidiary for the 52 weeks ended February 2, 2002. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.



We
conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows
of Factory Card & Party Outlet Corp. and subsidiary for the 52 weeks ended February 2, 2002 in conformity with accounting principles generally accepted in the United States of America.



/s/    KPMG LLP



Chicago, Illinois

March 22, 2002, except as to the first paragraph of note 6, which is as of April 8, 2002



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except share data)



|                                                                                                                                                                                      |  |                  |        |   |                  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                                                                                      |  | January 31, 2004 |        |   | February 1, 2003 |  
|A S S E T S                                                                                                                                                                           |  |                  |        |   |                  |   |        |  
|Current assets:                                                                                                                                                                       |  |                  |        |   |                  |   |        |  
|Cash                                                                                                                                                                                  |  | $                | 179    |   |                  | $ | 196    |  
|Merchandise inventories, net                                                                                                                                                          |  |                  | 45,667 |   |                  |   | 48,190 |  
|Prepaid expenses and other                                                                                                                                                            |  |                  | 4,089  |   |                  |   | 4,088  |  
|                                                                                                                                                                                      |  |                  |        |   |                  |   |        |  
|Total current assets                                                                                                                                                                  |  |                  | 49,935 |   |                  |   | 52,474 |  
|Fixed assets, net                                                                                                                                                                     |  |                  | 7,551  |   |                  |   | 6,801  |  
|Other assets                                                                                                                                                                          |  |                  | 259    |   |                  |   | 389    |  
|Deferred tax asset, net                                                                                                                                                               |  |                  | 427    |   |                  |   | 376    |  
|                                                                                                                                                                                      |  |                  |        |   |                  |   |        |  
|Total assets                                                                                                                                                                          |  | $                | 58,172 |   |                  | $ | 60,040 |  
|                                                                                                                                                                                      |  |                  |        |   |                  |   |        |  
|L I A B I L I T I E S    A N D    S T O C K H O L D E R S  
  E Q U I T Y                                                                                                            |  |                  |        |   |                  |   |        |  
|Current liabilities:                                                                                                                                                                  |  |                  |        |   |                  |   |        |  
|Debtline of credit                                                                                                                                                                   |  | $                | 9,763  |   |                  | $ | 17,528 |  
|Accounts payable                                                                                                                                                                      |  |                  | 15,929 |   |                  |   | 12,965 |  
|Accrued expenses                                                                                                                                                                      |  |                  | 6,974  |   |                  |   | 6,465  |  
|Current portion of long term debt and capital lease obligations                                                                                                                       |  |                  | 2,135  |   |                  |   | 440    |  
|                                                                                                                                                                                      |  |                  |        |   |                  |   |        |  
|Total current liabilities                                                                                                                                                             |  |                  | 34,801 |   |                  |   | 37,398 |  
|Long term debt and capital lease obligations                                                                                                                                          |  |                  | 3,699  |   |                  |   | 5,889  |  
|Deferred rent liabilities                                                                                                                                                             |  |                  | 1,725  |   |                  |   | 1,599  |  
|                                                                                                                                                                                      |  |                  |        |   |                  |   |        |  
|Total liabilities                                                                                                                                                                     |  |                  | 40,225 |   |                  |   | 44,886 |  
|                                                                                                                                                                                      |  |                  |        |   |                  |   |        |  
|Stockholders equity:                                                                                                                                                                 |  |                  |        |   |                  |   |        |  
|Common stock, $.01 par value. Voting class-authorized 10,000,000 shares; 3,074,082 and 3,021,820 shares issued and outstanding at January 31,
2004 and February 1, 2003, respectively |  |                  | 31     |   |                  |   | 30     |  
|Unearned restricted stock awards                                                                                                                                                      |  |                  | (275   | ) |                  |   | (446   | )
|Additional paid-in capital                                                                                                                                                            |  |                  | 14,287 |   |                  |   | 13,028 |  
|Accumulated earnings                                                                                                                                                                  |  |                  | 3,904  |   |                  |   | 2,542  |  
|                                                                                                                                                                                      |  |                  |        |   |                  |   |        |  
|Total stockholders equity                                                                                                                                                            |  |                  | 17,947 |   |                  |   | 15,154 |  
|                                                                                                                                                                                      |  |                  |        |   |                  |   |        |  
|Total liabilities and stockholders equity                                                                                                                                            |  | $                | 58,172 |   |                  | $ | 60,040 |  
|                                                                                                                                                                                      |  |                  |        |   |                  |   |        |  



See accompanying notes
to consolidated financial statements.

All share amounts are adjusted for the two-for-one stock split effective October 21, 2003 (note 2)



F-4



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollar amounts in thousands, except per share data)



|                                                  |  |                                       |           |                                       |   |                                      |  |   |                                       |   |  |   |         |  
|------------------------------------------------- |  | ------------------------------------- | --------- | ------------------------------------- | - | ------------------------------------ |  | - | ------------------------------------- | - |  | - | ------- | -
|                                                  |  | For the 52-weeks endedJanuary 31,2004 |           | For the 43-weeks endedFebruary 1,2003 |   | For the nineweeks endedApril 6, 2002 |  |   | For the 52-weeks endedFebruary 2,2002 |  
|                                                  |  | Successor Company                     |           | Successor Company                     |   | Predecessor Company                  |  |   | Predecessor Company                   |  
|Net sales                                         |  | $                                     | 222,635   |                                       | $ | 185,699                              |  | $ | 40,837                                |   |  | $ | 227,943 |  
|Cost of sales                                     |  |                                       | 145,372   |                                       |   | 122,435                              |  |   | 26,991                                |   |  |   | 149,871 |  
|                                                  |  |                                       |           |                                       |   |                                      |  |   |                                       |   |  |   |         |  
|Gross profit                                      |  |                                       | 77,263    |                                       |   | 63,264                               |  |   | 13,846                                |   |  |   | 78,072  |  
|Selling, general and administrative expenses      |  |                                       | 71,851    |                                       |   | 55,872                               |  |   | 12,212                                |   |  |   | 67,311  |  
|Depreciation                                      |  |                                       | 1,957     |                                       |   | 1,501                                |  |   | 1,030                                 |   |  |   | 6,826   |  
|Reorganization items                              |  |                                       |          |                                       |   |                                     |  |   | (18,840                               | ) |  |   | 6,653   |  
|Interest expense                                  |  |                                       | 1,182     |                                       |   | 1,368                                |  |   | 374                                   |   |  |   | 2,813   |  
|                                                  |  |                                       |           |                                       |   |                                      |  |   |                                       |   |  |   |         |  
|Income (loss) before income tax expense (benefit) |  |                                       | 2,273     |                                       |   | 4,523                                |  |   | 19,070                                |   |  |   | (5,531  | )
|Income tax expense (benefit)                      |  |                                       | 911       |                                       |   | 1,981                                |  |   | (360                                  | ) |  |   |        |  
|                                                  |  |                                       |           |                                       |   |                                      |  |   |                                       |   |  |   |         |  
|Net income (loss)                                 |  | $                                     | 1,362     |                                       | $ | 2,542                                |  | $ | 19,430                                |   |  | $ | (5,531  | )
|                                                  |  |                                       |           |                                       |   |                                      |  |   |                                       |   |  |   |         |  
|Net income per sharebasic                        |  | $                                     | 0.47      |                                       | $ | 0.89                                 |  |   |                                       |   |  |   |         |  
|                                                  |  |                                       |           |                                       |   |                                      |  |   |                                       |   |  |   |         |  
|Weighted average shares outstandingbasic         |  |                                       | 2,919,115 |                                       |   | 2,866,420                            |  |   |                                       |   |  |   |         |  
|                                                  |  |                                       |           |                                       |   |                                      |  |   |                                       |   |  |   |         |  
|Net income per sharediluted                      |  | $                                     | 0.40      |                                       | $ | 0.86                                 |  |   |                                       |   |  |   |         |  
|                                                  |  |                                       |           |                                       |   |                                      |  |   |                                       |   |  |   |         |  
|Weighted average shares outstandingdiluted       |  |                                       | 3,426,179 |                                       |   | 2,957,516                            |  |   |                                       |   |  |   |         |  
|                                                  |  |                                       |           |                                       |   |                                      |  |   |                                       |   |  |   |         |  





See accompanying notes to consolidated financial statements.

All share and per share
amounts are adjusted for the two-for-one stock split effective October 21, 2003 (note 2).



F-5



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

(Dollar amounts in thousands)



|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|-------------------------------------------------- |  | ------------ | - |  | ------ | --- | - | ------------------------ | - | ------- | ----------------------------- |  | - | ---------------------------- | - |  | --------------------------------- | ------- | - |  | - | ------- | -
|                                                   |  | Common Stock |   |  |        |     |   |                          |   |         |                               |  |   |                              |  
|Predecessor Company                                |  | Shares       |   |  | Amount |     |   | AdditionalPaid-inCapital |   |         | UnearnedRestrictedStockAwards |  |   | AccumulatedEarnings(Deficit) |   |  | TotalStockholdersEquity(Deficit) |        
|Balance at February 3, 2001                        |  | 7,503,098    |   |  | $      | 75  |   |                          | $ | 52,021  |                               |  | $ |                             |   |  | $                                 | (65,498 | ) |  | $ | (13,402 | )
|Net loss                                           |  |             |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   | (5,531  | ) |  |   | (5,531  | )
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|Balance at February 2, 2002                        |  | 7,503,098    |   |  |        | 75  |   |                          |   | 52,021  |                               |  |   |                             |   |  |                                   | (71,029 | ) |  |   | (18,933 | )
|Net income                                         |  |             |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   | 19,430  |   |  |   | 19,430  |  
|Elimination of old equity                          |  | (7,503,098   | ) |  |        | (75 | ) |                          |   | (52,021 | )                             |  |   |                             |   |  |                                   | 51,599  |   |  |   | (497    | )
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|Distribution of new equity                         |  | 2,999,096    |   |  |        | 30  |   |                          |   | 10,574  |                               |  |   | (564                         | ) |  |                                   |        |   |  |   | 10,040  |  
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|Balance April 6, 2002                              |  | 2,999,096    |   |  |        | 30  |   |                          |   | 10,574  |                               |  |   | (564                         | ) |  |                                   |        |   |  |   | 10,040  |  
|                                                   |  |              |   |  |        |    
|Successor Company                                  |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |        
|Exercise of management stock warrants              |  | 25,800       |   |  |        |    |   |                          |   | 97      |                               |  |   |                             |   |  |                                   |        |   |  |   | 97      |  
|Compensation cost  restricted stock awards        |  |             |   |  |        |    |   |                          |   |        |                               |  |   | 118                          |   |  |                                   |        |   |  |   | 118     |  
|Utilization of pre bankruptcy net operating losses |  |             |   |  |        |    |   |                          |   | 2,357   |                               |  |   |                             |   |  |                                   |        |   |  |   | 2,357   |  
|Adjustment to new shares issued                    |  | (3,076       | ) |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   |        |   |  |   |        |  
|Net income                                         |  |             |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   | 2,542   |   |  |   | 2,542   |  
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|Balance at February 1, 2003                        |  | 3,021,820    |   |  |        | 30  |   |                          |   | 13,028  |                               |  |   | (446                         | ) |  |                                   | 2,542   |   |  |   | 15,154  |  
|Adjustment to new shares issued                    |  | 3,076        |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   |        |   |  |   |        |  
|Right certificates                                 |  | 2,286        |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   |        |   |  |   |        |  
|Exercise of stock options and stock warrants       |  | 57,650       |   |  |        | 1   |   |                          |   | 337     |                               |  |   |                             |   |  |                                   |        |   |  |   | 338     |  
|Compensation costrestricted stock awards          |  |             |   |  |        |    |   |                          |   |        |                               |  |   | 131                          |   |  |                                   |        |   |  |   | 131     |  
|Forfeited restricted stock                         |  | (10,750      | ) |  |        |    |   |                          |   | (40     | )                             |  |   | 40                           |   |  |                                   |        |   |  |   |        |  
|Utilization of pre bankruptcy net operating losses |  |             |   |  |        |    |   |                          |   | 962     |                               |  |   |                             |   |  |                                   |        |   |  |   | 962     |  
|Net income                                         |  |             |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   | 1,362   |   |  |   | 1,362   |  
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|Balance at January 31, 2004                        |  | 3,074,082    |   |  | $      | 31  |   |                          | $ | 14,287  |                               |  | $ | (275                         | ) |  | $                                 | 3,904   |   |  | $ | 17,947  |  
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  

---

|* |  | All 150,000 shares of restricted common stock originally issued to the Companys management are considered outstanding for purposes of this financial statement.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying notes to consolidated financial
statements.

All share amounts subsequent to the distribution of new equity are

adjusted for the two-for-one stock split effective October 21, 2003 (note 2).



F-6



---

##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)



|                                                                                                   |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------------------- | -------- | - | --------------------------------------- | - | -------- | -------------------------------------- |  | - | --------------------------------------- | - |  | - | -------- | -
|                                                                                                   |  | For the 52-weeks ended January 31, 2004 |          |   | For the 43-weeks ended February 1, 2003 |   |          | For the nine weeks ended April 6, 2002 |  |   | For the 52-weeks ended February 2, 2002 |  
|                                                                                                   |  | Successor Company                       |          |   | Successor Company                       |   |          | Predecessor Company                    |  |   | Predecessor Company                     |  
|Cash flows from operating activities:                                                              |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Net income (loss)                                                                                  |  | $                                       | 1,362    |   |                                         | $ | 2,542    |                                        |  | $ | 19,430                                  |   |  | $ | (5,531   | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Plan of reorganization and fresh start adjustments                                                 |  |                                         |         |   |                                         |   |         |                                        |  |   | (21,898                                 | ) |  |   |         |  
|Depreciation and amortization of fixed assets                                                      |  |                                         | 1,957    |   |                                         |   | 1,501    |                                        |  |   | 1,030                                   |   |  |   | 6,826    |  
|Amortization of deferred financing costs and unearned compensation                                 |  |                                         | 331      |   |                                         |   | 205      |                                        |  |   | 26                                      |   |  |   | 646      |  
|Non cash portion of reorganization items                                                           |  |                                         |         |   |                                         |   |         |                                        |  |   | 1,275                                   |   |  |   | 2,422    |  
|Tax benefit of pre-confirmation net operating losses                                               |  |                                         | 962      |   |                                         |   | 2,357    |                                        |  |   |                                        |   |  |   |         |  
|Loss on disposal of fixed assets                                                                   |  |                                         |         |   |                                         |   |         |                                        |  |   |                                        |   |  |   | 11       |  
|Changes in assets and liabilities:                                                                 |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Merchandise inventories, net                                                                       |  |                                         | 2,523    |   |                                         |   | 3,401    |                                        |  |   | 2,212                                   |   |  |   | (3,613   | )
|Prepaid expenses and other assets                                                                  |  |                                         | (71      | ) |                                         |   | 1,127    |                                        |  |   | (2,594                                  | ) |  |   | (1,366   | )
|Deferred tax asset, net                                                                            |  |                                         | (51      | ) |                                         |   | (376     | )                                      |  |   |                                        |   |  |   |         |  
|Accounts payable                                                                                   |  |                                         | 2,964    |   |                                         |   | 1,603    |                                        |  |   | 3,336                                   |   |  |   | 437      |  
|Accrued expenses                                                                                   |  |                                         | 509      |   |                                         |   | (6,069   | )                                      |  |   | 2,020                                   |   |  |   | (177     | )
|Deferred rent obligation                                                                           |  |                                         | 126      |   |                                         |   | 1,599    |                                        |  |   |                                        |   |  |   |         |  
|Liabilities subject to compromise                                                                  |  |                                         |         |   |                                         |   |         |                                        |  |   |                                        |   |  |   | 95       |  
|                                                                                                   |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Net cash provided by (used in) operating activities                                                |  |                                         | 10,612   |   |                                         |   | 7,890    |                                        |  |   | 4,837                                   |   |  |   | (250     | )
|                                                                                                   |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Net cash used in investing activitiespurchase of fixed assets, net                                |  |                                         | (2,708   | ) |                                         |   | (2,462   | )                                      |  |   | (257                                    | ) |  |   | (1,143   | )
|Cash flow provided by (used in) financing activities:                                              |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Borrowings                                                                                         |  |                                         | 227,024  |   |                                         |   | 190,401  |                                        |  |   | 38,381                                  |   |  |   | 241,603  |  
|Repayment of debt                                                                                  |  |                                         | (234,789 | ) |                                         |   | (195,616 | )                                      |  |   | (42,898                                 | ) |  |   | (240,042 | )
|Payment of long term obligations                                                                   |  |                                         | (440     | ) |                                         |   | (408     | )                                      |  |   | (56                                     | ) |  |   | (267     | )
|Increase (decrease) in long term debt                                                              |  |                                         | (54      | ) |                                         |   | 105      |                                        |  |   |                                        |   |  |   |         |  
|Cash received from exercise of management stock warrants and stock options                         |  |                                         | 338      |   |                                         |   | 97       |                                        |  |   |                                        |   |  |   |         |  
|                                                                                                   |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Net cash provided by (used in) financing activities                                                |  |                                         | (7,921   | ) |                                         |   | (5,421   | )                                      |  |   | (4,573                                  | ) |  |   | 1,294    |  
|                                                                                                   |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Net increase (decrease) in cash                                                                    |  |                                         | (17      | ) |                                         |   | 7        |                                        |  |   | 7                                       |   |  |   | (99      | )
|Cash at beginning of period                                                                        |  |                                         | 196      |   |                                         |   | 189      |                                        |  |   | 182                                     |   |  |   | 281      |  
|                                                                                                   |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Cash at end of period                                                                              |  | $                                       | 179      |   |                                         | $ | 196      |                                        |  | $ | 189                                     |   |  | $ | 182      |  
|                                                                                                   |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Supplemental cash flow information:                                                                |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Interest paid                                                                                      |  | $                                       | 796      |   |                                         | $ | 1,045    |                                        |  | $ | 334                                     |   |  | $ | 2,250    |  
|Alternative minimum taxes paid                                                                     |  |                                         | 45       |   |                                         |   | 57       |                                        |  |   |                                        |   |  |   |         |  
|Cash paid for reorganization items                                                                 |  |                                         |         |   |                                         |   | 5,648    |                                        |  |   | 1,055                                   |   |  |   | 5,865    |  
|Income taxes refunded                                                                              |  |                                         |         |   |                                         |   | (360     | )                                      |  |   |                                        |   |  |   |         |  
|Supplemental non cash information:                                                                 |  |                                         |          |   |                                         |   |          |                                        |  |   |                                         |   |  |   |          |  
|Stock issued (successor company)                                                                   |  |                                         |         |   |                                         |   |         |                                        |  |   | (10,040                                 | ) |  |   |         |  
|Fair value adjustments                                                                             |  |                                         |         |   |                                         |   |         |                                        |  |   | 10,406                                  |   |  |   |         |  
|Stock retirement (predecessor company) and debt discharge                                          |  |                                         |         |   |                                         |   |         |                                        |  |   | (22,828                                 | ) |  |   |         |  
|Unearned restricted stock awards                                                                   |  |                                         | 275      |   |                                         |   | 446      |                                        |  |   | 564                                     |   |  |   |         |  
|Capital lease obligations incurred                                                                 |  |                                         |         |   |                                         |   |         |                                        |  |   | 56                                      |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



F-7



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)



(1)    Reorganization and Emergence from Chapter 11



On March 23, 1999 (the petition date),
Factory Card & Party Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet of America Ltd. (collectively the Company), filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the
Bankruptcy Code) under case numbers 99-685(JCA) and 99-686(JCA) (the Chapter 11 Cases). From that time until March 20, 2002, the Company operated the business as a debtor-in-possession subject to the jurisdiction and
supervision of the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court). On March 20, 2002, the Company announced that the Bankruptcy Court confirmed the Amended Plan of Reorganization (the Plan of
Reorganization) that was filed with the Bankruptcy Court on February 5, 2002. On April 9, 2002 (the Effective Date) the Plan of Reorganization became effective and the Company successfully emerged from Chapter 11.



Certain of the principal provisions of the Plan of Reorganization are as
follows:



| |  |  | The Company authorized an aggregate of 10,000,000 shares of new Common Stock, par value $0.01 per share. The Companys amended and restated certificate of incorporation
prohibits the transfer of any shares of the new Common Stock or any rights to acquire shares of the new Common Stock to any person or group that is a 5% or higher shareholder of Factory Card & Party Outlet Corp.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The common stock of Factory Card & Party Outlet Corp. that was outstanding immediately prior to the Plan becoming effective was canceled and 149,106 shares of the Companys
new Common Stock were issued to holders of the canceled common stock at a ratio of .019846 shares of new Common Stock for each share of canceled common stock.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company issued 2,699,990 shares of the new Common Stock to holders of unsecured claims against the Company, or General Unsecured Creditors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company issued 150,000 shares of the new Common Stock to certain members of management, vesting ratably over a four-year period, as specified in the Plan, and warrants to
purchase an aggregate 62,000 shares of its new Common Stock at a purchase price of $3.76 per share. The exercise of warrants on June 7, 2002 allowed the holders to purchase 25,800 shares of new Common Stock and the remaining 36,200 warrants expired.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company issued four series of new Warrants, Series A through D, to tendering holders of the canceled Common Stock, granting such holders the right to purchase an aggregate of
306,934 additional shares of the new Common Stock. The Series A Warrants are exercisable any time prior to April 9, 2006 at a price of $5.50 per share. The Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $8.00 per
share. The Series C Warrants are exercisable any time prior to April 9, 2010 at a price of $8.00 per share. The Series D Warrants are exercisable any time prior to April 9, 2010 at a price of $17.00 per share.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company adopted an employee stock option plan, the 2002 Stock Option Plan, to provide the Companys eligible employees with the opportunity to purchase an aggregate 333,334
shares of its new Common Stock.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company paid $1,000 to the General Unsecured Creditors within 60 days of the Effective Date and agreed to pay the General Unsecured Creditors, three years from emergence an
aggregate of $2,600, less any prepayments. This obligation is secured by a subordinated lien on certain property of the Company. On March 17, 2004, the Company elected to make a prepayment on the $2,600 obligation that totaled $133, net of discount.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-8



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| |  |  | The Company converted an aggregate of $3,130 post petition accounts payable into long-term convertible secured subordinated notes (the Trade Conversion Notes) to seven
trade vendors and suppliers (the Trade Participants). This obligation is secured by a subordinated lien on certain of our property. The Trade Participants each have the right to convert their Trade Conversion Notes in whole, or in part,
into an aggregate of 29.35% of the new Common Stock, at any time between April 9, 2005 (the third anniversary of the Plans Effective Date) and April 9, 2006 (the fourth anniversary of such date), subject to adjustments to reflect any
prepayments made by the Company. In April 2003, the Company made an interest payment on the Trade Conversion Notes of $188. Additionally, on March 17, 2004 the Company elected to make a prepayment on the Trade Conversion Note that totaled $1,007,
net of discount. These prepayments reduced the percentage of Common Stock that can be converted into Common Stock Outstanding to 21.1%.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company entered into five separate agreements with various trade vendors, each dated April 9, 2002, pursuant to which such trade vendors agreed to provide the Company with
payment terms, including extended payment terms and seasonal advances.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(2)    Two-for-one Stock Split



On September 10, 2003, the Company announced a two-for-one stock split effective October 21, 2003 for holders of record on October 7, 2003. Accordingly, data related to the Companys Common Stock (number of shares, averages shares
outstanding and earnings per share) have been adjusted for the prior periods subsequent to emergence to reflect the impact of this stock split.



(3)    Fresh Start Accounting



Pursuant to the guidance provided by the American Institute of Certified Public Accountants in Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code (SOP 90-7), the Company adopted fresh-start reporting because holders of existing voting shares immediately before filing and confirmation of the plan received less than 50% of
the voting shares of the emerging entity and its reorganization value was less than its post petition liabilities and allowed claims.



As a result of fresh-start reporting, the Company reflected the distributions under the Plan of Reorganization in the balance sheet as of April 6, 2002
(the effective date of the consummation of the plan for accounting purposes). Accordingly, all consolidated financial statements for any period prior to April 6, 2002 are referred to as the Predecessor Company as they reflect the periods
prior to the implementation of fresh-start reporting and are not comparable to the consolidated financial statements for periods after the implementation of fresh-start reporting.



F-9



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Fresh-start reporting requires that the reorganization value of the reorganized debtors be allocated
to their assets in conformity with Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations, for transactions reported on the basis of the purchase method. Any reorganization value less than the fair
value of the specific tangible or identified intangible assets is to be allocated to their non-current tangible assets on a pro rata basis after offsetting any intangible assets. The reorganized enterprise value of the Company on the effective date
was established at $42,500 based upon a calculation of discounted cash flows under the Companys financial projections and trading multiples of comparable companies. The effects of the Plan of Reorganization and the application of fresh-start
accounting on the Companys pre-confirmation consolidated balance sheet are as follows:



|                                                                                          |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|----------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | --------------------- | - | ------- | ---------------------- |  | - | ---------------------- | -- |  | - | ------
|                                                                                          |  | Predecessor April 6,2002 |         |   | Plan ofReorganization |   |         | Fresh StartAdjustments |  |   | Successor April 6,2002
|A S S E T S                                                                               |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|Current assets:                                                                           |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|Cash                                                                                      |  | $                        | 189     |   |                       |   |         |                        |  |   |                        |    |  | $ | 189   
|Merchandise inventories                                                                   |  |                          | 56,987  |   |                       |   |         |                        |  |   | (5,396                 | )i |  |   | 51,591
|Prepaid expenses and other                                                                |  |                          | 5,251   |   |                       |   |         |                        |  |   |                        |    |  |   | 5,251 
|                                                                                          |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|Total current assets                                                                      |  |                          | 62,427  |   |                       |   |         |                        |  |   | (5,396                 | )  |  |   | 57,031
|Fixed assets, net                                                                         |  |                          | 17,600  |   |                       |   |         |                        |  |   | (11,760                | )a |  |   | 5,840 
|Other assets                                                                              |  |                          | 240     |   |                       |   | 200     | b                      |  |   |                        |    |  |   | 440   
|                                                                                          |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|Total assets                                                                              |  | $                        | 80,267  |   |                       | $ | 200     |                        |  | $ | (17,156                | )  |  | $ | 63,311
|                                                                                          |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|L I A B I L I T I E S    A N D    S T O C K H O L D E R S
E Q U I T Y    (D E F I C I T) |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|Current liabilities:                                                                      |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|Debt                                                                                      |  |                          |         |   |                       | $ | 22,743  | c                      |  |   |                        |    |  | $ | 22,743
|Debtor-in-possession financing                                                            |  |                          | 22,543  |   |                       |   | (22,543 | )c                     |  |   |                        |    |  |   |      
|Accounts payable                                                                          |  |                          | 11,407  |   |                       |   | (3,130  | )d                     |  |   |                        |    |  |   | 8,277 
|Accrued expenses                                                                          |  |                          | 12,534  |   |                       |   |         |                        |  |   |                        |    |  |   | 12,534
|Liabilities subject to settlement                                                         |  |                          |         |   |                       |   | 3,085   | e                      |  |   |                        |    |  |   | 3,085 
|                                                                                          |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|Total current liabilities                                                                 |  |                          | 46,484  |   |                       |   | 155     |                        |  |   |                        |    |  |   | 46,639
|                                                                                          |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|Long term notes payable and capital leases                                                |  |                          | 1,128   |   |                       |   | 5,504   | d,h                    |  |   |                        |    |  |   | 6,632 
|Deferred rent liabilities                                                                 |  |                          |        |   |                       |   | 6,750   | f                      |  |   | (6,750                 | )a |  |   |      
|Liabilities subject to compromise                                                         |  |                          | 54,056  |   |                       |   | (54,056 | )f                     |  |   |                        |    |  |   |      
|                                                                                          |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|Total liabilities                                                                         |  |                          | 101,668 |   |                       |   | (41,647 | )                      |  |   | (6,750                 | )  |  |   | 53,271
|Stockholders equity (deficit)                                                            |  |                          | (21,401 | ) |                       |   | 41,847  | g                      |  |   | (10,406                | )g |  |   | 10,040
|                                                                                          |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       
|Total liabilities & stockholders equity (deficit)                                        |  | $                        | 80,267  |   |                       | $ | 200     |                        |  | $ | (17,156                | )a |  | $ | 63,311
|                                                                                          |  |                          |         |   |                       |   |         |                        |  |   |                        |    |  |   |       

---

|(a) |  | To reduce the excess of book value over enterprise value.
|--- |  | ---------------------------------------------------------

|(b) |  | To record $200 of deferred financing costs related to exit financing with Wells Fargo Retail Finance LLP.
|--- |  | ---------------------------------------------------------------------------------------------------------

|(c) |  | Borrowings under new line of credit agreement with Wells Fargo Retail Finance, LLP. Existing debtor-in possession financing agreement was paid in full upon the effective date of the
Plan of Reorganization.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | To record the conversion of post-petition accounts payable into the $3,130 Trade Conversion Note.
|--- |  | -------------------------------------------------------------------------------------------------

|(e) |  | To record $1,000 payable due to creditors, $1,700 payable in landlord cure amounts, $323 payable in priority claims and $62 payable in convenience claims. Amounts were paid within
60 days of the Effective Date.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-10



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|(f) |  | To record elimination of pre-petition liabilities subject to compromise. Pre-petition liabilities subject to compromise included deferred rent liabilities that were not extinguished
by the Bankruptcy Court.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) |  | To write-off old equity upon emergence from chapter 11 and record the issuance of new stock in accordance with the Plan of Reorganization and to adjust the accumulated deficit by
the portion of the liabilities subject to compromise that is forgiven.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(h) |  | To record at fair value the $2,600 creditor agreement.
|--- |  | ------------------------------------------------------

|(i) |  | To eliminate the capitalization of certain buying and warehousing costs associated with a change in accounting principle.
|--- |  | -------------------------------------------------------------------------------------------------------------------------



(4)    Summary of Significant Accounting Policies



Basis of Presentation and Organization



The Company is a chain of company-owned stores offering a wide selection of
party supplies, greeting cards, giftwrap, balloons, everyday and seasonal merchandise and other special occasion merchandise at everyday value prices. The consolidated financial statements include the accounts of Factory Card & Party Outlet
Corp. and its wholly owned subsidiary, Factory Card Outlet of America Ltd. All intercompany balances and transactions have been eliminated in consolidation.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company
to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and related disclosures. Actual
results could differ from those estimates.



Fiscal Years



The Companys fiscal year ends on the Saturday
closest to January 31st. The following table describes the periods presented in the financial statements and related notes thereto:

|
|

|                                                                    |  |                                      
|------------------------------------------------------------------- |  | -------------------------------------
|Period:                                                             |  | Referred to as:                      
|Results for the 52-weeks ended January 31, 2004Successor Company   |  | Fiscal 2003                        
|                                                                   
|Results for the 43-weeks ended February 1, 2003Successor Company   |  | Successor Company 2002 43-weeks    
|                                                                   
|Results for the nine weeks ended April 6, 2002Predecessor Company  |  | Predecessor Company 2002 nine weeks
|                                                                   
|Results for the 52-weeks ended February 2, 2002Predecessor Company |  | Fiscal 2001                        
|                                                                   



Merchandise
Inventories



Merchandise inventories are stated at the
lower of average cost or estimated net realizable value utilizing the retail method. The Company purchases inventory from more than 300 vendors world-wide, with the largest supplier representing approximately 20% and the ten largest suppliers
representing approximately 47% of the Companys aggregate purchases for the 52-weeks ended January 31, 2004. Purchases for the combined 52-weeks



F-11



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



ended February 1, 2003 [Successor Company 2002 43-weeks and Predecessor Company 2002 nine weeks] the Companys largest supplier represented
approximately 12% and the ten largest suppliers represented approximately 43% of the Companys aggregate purchases. In Fiscal 2001 the Companys largest supplier represented approximately 11% and the ten largest suppliers represented
approximately 41% of the Companys aggregate purchases.



Prior to emergence from bankruptcy, the Company capitalized certain buying and warehousing costs as a component of inventory. As of the emergence date, the Company discontinued this practice, recording all of the aforementioned costs in
cost of sales. Going forward, the Company does not anticipate the change will have a significant impact on periodic earnings.



At January 31, 2004 and February 1, 2003, the Company had reserves of $1,117 and $1,545 respectively, for certain merchandise, which is to be discontinued
from the ongoing inventory assortment, as well as inventory with excess quantities on hand, and certain seasonal inventory remaining from past holidays.



Cooperative Advertising, Markdown Reimbursement and Placement Fees



The Company receives vendor allowances principally as a result of meeting defined purchase levels or promoting vendors
products. Those received as a result of purchase levels are accrued as a reduction of merchandise purchase price over the incentive period and result in a reduction of cost of sales. Those received for promoting vendors products are offset
against advertising expense and result in a reduction of selling, general and administrative expenses to the extent that the allowance received does not exceed the cost of advertising the vendors merchandise. Markdown allowances reduce cost of
goods sold in the period the related markdown was taken. Placement allowances are offset against incremental expenses incurred and the remainder, if any, over the contract period.



Fixed Assets



Fixed asset additions are recorded at cost. Depreciation is computed on a straight-line basis over three to ten years for fixtures and equipment and over
the initial term of the lease for leasehold improvements. Depreciation related to capital leases is also included in depreciation. Pursuant to SOP 90-7, the Company adjusted the net book value of fixed assets by $11,760 at April 6, 2002. See Note 3
Fresh Start Accounting.



The Company reviews
long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs operating cash flow analyses to determine if impairment exists.
If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less cost of disposal.



Income Taxes



The Company files a consolidated federal income tax return. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting and tax basis of assets and liabilities and are determined using tax rates and laws that are expected to be in effect
when the differences are expected to reverse.



Deferred Rent
Liabilities



Certain operating leases provide for
scheduled increases in base rentals over their terms. For these leases, the Company recognizes the total rental amounts expected to be paid over the lease terms on a straight-line basis



F-12



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



and, accordingly, have established corresponding deferred rent liabilities for the differences between the amounts recognized and the amounts paid. The
Company also receives certain lease incentives. These allowances have been deferred and are amortized on a straight-line basis over the initial term of a lease as a reduction of rent expense.



Revenue Recognition



The Company records revenue at the point of sale for retail stores. The
Company provides for returns at the time of sale based upon projected merchandise returns.



Advertising Expenses



The Company expenses advertising costs when the advertising first occurs. Advertising production costs incurred before the advertising takes place are recorded as a prepaid expense. At January 31, 2004 and February 1, 2003, $62 and $93
of advertising production costs were included in prepaid expenses, respectively. In Fiscal 2003 advertising expense was $10,215. In the Successor Company 2002 43-weeks and Predecessor Company 2002 nine weeks, advertising expense was $5,903 and
$1,647, respectively. In Fiscal 2001 advertising expense was $7,218.



Store Pre-opening Expenses



The Company
expenses store pre-opening expenses as incurred. These expenses include labor, advertising and supply costs incurred up to the stores grand opening.



Earnings per Share



In accordance with SFAS No. 128 Earnings per Share, earnings per sharebasic was computed by dividing net income by the weighted average
number of common shares outstanding during the period. Earnings per sharediluted assumes, in addition to above, the effect of potentially dilutive securities.



The reconciliation of earnings per share basic to earnings per share diluted is as follows:



|                                                                 |  |             |           |                                 |   |          
|---------------------------------------------------------------- |  | ----------- | --------- | ------------------------------- | - | ---------
|                                                                 |  | Fiscal 2003 |           | Successor Company 2002 43-weeks
|Net income                                                       |  | $           | 1,362     |                                 | $ | 2,542    
|Earnings per sharebasic                                         |  | $           | 0.47      |                                 | $ | 0.89     
|Earnings per sharediluted                                       |  | $           | 0.40      |                                 | $ | 0.86     
|Weighted average common shares outstanding                       |  |             | 2,919,115 |                                 |   | 2,866,420
|Dilutive effect of stock options and warrants                    |  |             | 507,064   |                                 |   | 91,096   
|                                                                 |  |             |           |                                 |   |          
|Weighted average common and common equivalent shares outstanding |  |             | 3,426,179 |                                 |   | 2,957,516
|                                                                 |  |             |           |                                 |   |          
|Options and warrants excluded from dilutive calculation          |  |             | 62,952    |                                 |   | 306,934  
|                                                                 |  |             |           |                                 |   |          



The dilutive impact of
stock options and warrants was calculated using the treasury method. Options and warrants excluded from the dilutive calculation were outstanding but were not included in the computation of diluted earnings per share because to do so would have been
anti-dilutive for the periods presented.



Per share and share
information for the Predecessor Company for all periods presented in the Consolidated Statements of Operations have been omitted as such information is not deemed to be meaningful due to the fresh-start accounting entries booked for the Successor
Company and the resulting lack of comparability to Predecessor Company periods.



F-13



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock-Based Compensation



The Company accounts for stock option plans under Accounting Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees, under which no compensation cost has been recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 Accounting for Stock Based Compensation and has been
determined as if the Company had accounted for stock option plans under the fair value method of SFAS No. 123. Had the Company determined compensation cost based upon the fair value at the grant date for its stock options under SFAS No. 123, net
income would have changed as indicated below:



|                                                                                                                                     |  |             |       |                                |   |      
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ----- | ------------------------------ | - | -----
|                                                                                                                                     |  | Fiscal 2003 |       | Successor Company2002 43-weeks
|Net income, as reported                                                                                                              |  | $           | 1,362 |                                | $ | 2,542
|Deduct: Total stock-based employee compensation expense determined under fair value basis for all awards, net of related tax
effects |  |             | 345   |                                |   | 99   
|                                                                                                                                     |  |             |       |                                |   |      
|Pro forma net income                                                                                                                 |  | $           | 1,017 |                                | $ | 2,443
|                                                                                                                                     |  |             |       |                                |   |      
|Earnings per share:                                                                                                                  |  |             |       |                                |   |      
|Basicas reported                                                                                                                    |  | $           | 0.47  |                                | $ | 0.89 
|                                                                                                                                     |  |             |       |                                |   |      
|Basicpro forma                                                                                                                      |  | $           | 0.35  |                                | $ | 0.85 
|                                                                                                                                     |  |             |       |                                |   |      
|Dilutedas reported                                                                                                                  |  | $           | 0.40  |                                | $ | 0.86 
|                                                                                                                                     |  |             |       |                                |   |      
|Dilutedpro forma                                                                                                                    |  | $           | 0.30  |                                | $ | 0.83 
|                                                                                                                                     |  |             |       |                                |   |      



The per share weighted
average fair value of stock options granted during Fiscal 2003 and the Successor Company 2002 43-weeks was estimated using the Black Scholes Option-Pricing Model with the following weighted average assumptions: expected dividend rate 0.0%, risk free
interest rate of 3.875%, volatility of 50% and an expected life of approximately 10 years.



Reclassifications



Certain prior year amounts have been reclassified to conform with current year presentation. Store occupancy costs for Fiscal 2001 have been reclassified from selling, general and administrative expenses to cost of sales to present this
information on a basis comparable to the Companys competitors.



(5)    Fixed Assets



The
components of fixed assets, net are as follows:



|                                               |  |                  |        |                  |   |      
|---------------------------------------------- |  | ---------------- | ------ | ---------------- | - | -----
|                                               |  | SuccessorCompany |        | SuccessorCompany
|                                               |  | January 31,2004  |        | February 1,2003 
|Furniture and equipment                        |  | $                | 6,686  |                  | $ | 4,938
|Leasehold improvements                         |  |                  | 4,324  |                  |   | 3,364
|                                               |  |                  |        |                  |   |      
|Total fixed assets                             |  |                  | 11,010 |                  |   | 8,302
|Less accumulated depreciation and amortization |  |                  | 3,459  |                  |   | 1,501
|                                               |  |                  |        |                  |   |      
|Fixed assets, net                              |  | $                | 7,551  |                  | $ | 6,801
|                                               |  |                  |        |                  |   |      



F-14



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Pursuant to Fresh Start Accounting under SOP 90-7, the Company wrote down the value of fixed assets
by $11,760 on April 6, 2002 to adjust for the excess of book value over enterprise value. In Fiscal 2003 depreciation expense was $1,957. In the Successor Company 2002 43-weeks and Predecessor Company 2002 nine weeks, depreciation expense was $1,501
and $1,030, respectively. In Fiscal 2001 depreciation expense was $6,826.



(6)    Debt



On April 8, 2002, the Company entered into a $40,000 secured financing facility with Wells Fargo Retail Finance, LLC (the New Loan Agreement), which became effective concurrent with the Plan.



On the Effective Date, obligations relating the Companys
debtor-in-possession financing facility were paid in full and the Companys New Loan Agreement became effective. The New Loan Agreement, which is a line of credit, currently provides up to $40,000 (including $10,000 for letters of credit) to
fund working capital needs and for general corporate purposes. Borrowings under the facility are limited by a percent of inventory levels. The Loan Agreement expires on April 8, 2005 and has a variable interest rate based upon the Prime rate or at
the Companys option, a variable rate based upon earnings performance and the London Interbank Offered Rate with a minimum threshold of 5.00%. In April 2004, the Company extended the expiration date of the New Loan Agreement to April 8, 2007.
Pursuant to the amendment, the line of credit line was reduced to $30 million and minimum interest rate threshold of five percent was eliminated. The interest rate on the Companys borrowings was 5.0% at January 31, 2004. Borrowings under the
Loan Agreement are secured by substantially all of the Companys assets. Certain restrictive covenants apply, including achievement of specified operating results and limitations on the incurrence of additional liens and indebtedness, capital
expenditures, asset sales and payment of dividends, all of which have been met.



Due to the fact there are certain restrictions on the Companys assets and the Company has guaranteed the New Loan Agreement between its subsidiary and Wells Fargo Retail Finance, LLC, the Company is required to
file Condensed Financial Information of Factory Card & Party Outlet Corp. on pages S-1 through S-5.



At January 31, 2004 and February 1, 2003, the Company had outstanding borrowings under the New Loan Agreement of $9,763 and $17,528, respectively.



(7)    Long Term Debt and Capital Lease Obligations



Pursuant to the Plan of Reorganization, the Company
converted $3,130 of post petition trade payables into the Trade Conversion Note, which will be payable within four years of the Effective Date. In addition, the Company recorded at fair value a $2,600 extended creditor payment to the general
unsecured creditors.



In April 2003, the Company made an
interest payment to the holders of the Trade Conversion Note of $188. Additionally, on March 17, 2004, the Company elected to make a prepayment, net of discount, on the Trade Conversion Note and the extended creditor payment. The amount paid on
March 17, 2004 was $1,140.



Both the Trade Conversion Note and
extended creditor payment are subject to prepayment provisions if the Companys average excess availability on the New Loan Agreement exceeds $12,000 during the prior fiscal year. In such event, 40% of the excess availability greater than
$12,000 shall be paid, subject to certain maximum payment amounts, on a pro rata basis to the Trade Conversion Note holders and general unsecured creditors related to the extended creditor payable. Based upon the Companys excess availability
through Fiscal 2003, the Company is subject to a maximum prepayment amount of $735, which is due May 31, 2004.



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FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table summarizes the components of Debt and Capital Lease Obligations at January 31,
2004 and February 1, 2003, including the current portion.

|                                                         |  |                   |         |   |                   |   |         |  
|-------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                         |  | Successor Company |         |   | Successor Company |  
|                                                         |  | January 31,2004   |         |   | February 1,2003   |  
|Wells Fargo Retail Finance, LLC line of credit agreement |  | $                 | 9,763   |   |                   | $ | 17,528  |  
|Trade conversion note                                    |  |                   | 3,130   |   |                   |   | 3,130   |  
|Discounted value of extended creditor payment            |  |                   | 2,425   |   |                   |   | 2,479   |  
|Financing agreements                                     |  |                   | 210     |   |                   |   | 614     |  
|Capital leases                                           |  |                   | 69      |   |                   |   | 106     |  
|                                                         |  |                   |         |   |                   |   |         |  
|Sub total                                                |  |                   | 15,597  |   |                   |   | 23,857  |  
|                                                         |  |                   |         |   |                   |   |         |  
|Less current maturities                                  |  |                   | (11,898 | ) |                   |   | (17,968 | )
|                                                         |  |                   |         |   |                   |   |         |  
|Total long term debt                                     |  | $                 | 3,699   |   |                   | $ | 5,889   |  
|                                                         |  |                   |         |   |                   |   |         |  



The following schedule
summarizes future payments in excess of one year for Debt and Capital Lease Obligations at January 31, 2004.



|               |  |                                    |        |  
|-------------- |  | ---------------------------------- | ------ | -
|               |  | Successor Company                  |       
|               |  | Debt and Capital Lease Obligations |       
|Fiscal year:   |  |                                    |        |  
|2004           |  | $                                  | 12,093 |  
|2005           |  |                                    | 3,990  |  
|2006           |  |                                    | 14     |  
|2007           |  |                                    | 1      |  
|Thereafter     |  |                                    |       |  
|               |  |                                    |        |  
|Total payments |  | $                                  | 16,098 |  
|               |  |                                    |        |  
|Less interest  |  |                                    | (501   | )
|               |  |                                    |        |  
|Total payments |  |                                    | 15,597 |  
|               |  |                                    |        |  



Included in Fiscal
year 2004 is the Wells Fargo Retail Finance, LLC line of credit agreement of $9,763.



(8)    Lease Commitments



The Company conducts substantially all of its activities using leased premises. Store and office leases generally provide that real estate taxes, insurance, common area maintenance, and operating expenses are the Companys obligations.
Certain store leases also provide for contingent rentals based on sales in excess of specified minimums.



The approximate cost of fixed assets held under capital leases included in fixed assets was $1,061 and $1,059 at January 31, 2004 and February 1, 2003,
respectively. Accumulated depreciation related to such fixed assets was approximately $416 and $196 at January 31, 2004 and February 1, 2003, respectively. Fixed assets held under capital leases consist primarily of technology, office and warehouse
equipment.



F-16



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following is a schedule of future lease payments for capital and operating leases as well as
other financing agreements with initial or remaining terms in excess of one year as of January 31, 2004.



|                                  |  |                                    |     |   |                 |   |       
|--------------------------------- |  | ---------------------------------- | --- | - | --------------- | - | ------
|                                  |  | CapitalLeases &FinancingAgreements |     |   | Operatingleases
|Fiscal year:                      |  |                                    |     |   |                 |   |       
|2004                              |  | $                                  | 262 |   |                 | $ | 26,202
|2005                              |  |                                    | 15  |   |                 |   | 23,278
|2006                              |  |                                    | 14  |   |                 |   | 19,373
|2007                              |  |                                    | 1   |   |                 |   | 14,440
|Thereafter                        |  |                                    |    |   |                 |   | 16,303
|                                  |  |                                    |     |   |                 |   |       
|Total payments                    |  |                                    | 292 |   |                 | $ | 99,596
|                                  |  |                                    |     |   |                 |   |       
|Less amount representing interest |  |                                    | (13 | ) |                 |   |       
|                                  |  |                                    |     |   |                 |   |       
|Present value of payments         |  | $                                  | 279 |   |                 |   |       
|                                  |  |                                    |     |   |                 |   |       



Rent expense charged
to operations under operating leases was $24,873, $20,617, $3,984 and $23,955 in Fiscal 2003, Successor Company 2002 43-weeks, Predecessor Company 2002 nine weeks and Fiscal 2001, respectively.



(9)    Reorganization Items



Reorganization Items consisted of professional fees related to legal,
accounting and consulting services directly attributable to the Plan of Reorganization, store closing costs and employee retention bonuses. In addition, Reorganization Items also include the gain associated with the forgiveness of debt offset by
fresh-start adjustments and distribution of ownership share in the Reorganized Company to the unsecured creditors during the nine weeks ended April 6, 2002. The components of Reorganization Items are as follows:



|                                                            |  |                              |         |   |             |   |      
|----------------------------------------------------------- |  | ---------------------------- | ------- | - | ----------- | - | -----
|Reorganization Items:                                       |  | Nine weeksended April 6,2002 |         |   | Fiscal 2001
|Professional fees                                           |  | $                            | 1,379   |   |             | $ | 3,557
|Severance/retention bonus                                   |  |                              | 1,026   |   |             |   | 1,469
|Closed store expense                                        |  |                              | 311     |   |             |   | 757  
|Fresh start adjustments                                     |  |                              | 10,406  |   |             |   |     
|Forgiveness of debt                                         |  |                              | (41,847 | ) |             |   |     
|Unsecured creditors ownership share of reorganized Company |  |                              | 9,543   |   |             |   |     
|Other                                                       |  |                              | 342     |   |             |   | 870  
|                                                            |  |                              |         |   |             |   |      
|Total                                                       |  | $                            | (18,840 | ) |             | $ | 6,653
|                                                            |  |                              |         |   |             |   |      



The Successor Company
has not recorded any Reorganization Items.



In Fiscal 2001, the
Company closed and conducted closing sales at three stores that were in markets the Company did not intend to continue to operate in or were underperforming or unprofitable. During Fiscal 2001, the Company recorded a provision for reorganization
costs relating to these store closings of approximately $757. This provision included the write-down of fixed assets, estimated lease rejection claims and the loss on the disposition of merchandise inventory. Furthermore, in accordance with SFAS No.
121, Accounting for the



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company wrote off $697 of impaired long-lived assets that related to
prior year store closingsincluded in Other.



(10)    Income Taxes



Income taxes (benefit) are as follows:

|
|

|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|----------------------------------- |  | ------- | ---- | - | -------- | - | ----- | ------------------- |  | - | ------ | - |  | - | ----- | -
|                                    |  | Current |      |   | Deferred |   |       | Valuation Allowance |  |   | Total  |  
|Fiscal 2003                         |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Federal                             |  | $       | 3    |   |          | $ | 815   |                     |  | $ |       |   |  | $ | 818   |  
|State                               |  |         |     |   |          |   | 93    |                     |  |   |       |   |  |   | 93    |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|                                    |  | $       | 3    |   |          | $ | 908   |                     |  | $ |       |   |  | $ | 911   |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Successor Company 2002 43-weeks     |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Federal                             |  | $       | 69   |   |          | $ | 1,697 |                     |  | $ |       |   |  | $ | 1,766 |  
|State                               |  |         |     |   |          |   | 215   |                     |  |   |       |   |  |   | 215   |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|                                    |  | $       | 69   |   |          | $ | 1,912 |                     |  | $ |       |   |  | $ | 1,981 |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Predecessor Company 2002 nine weeks |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Federal                             |  | $       | (360 | ) |          | $ | 7,354 |                     |  | $ | (7,354 | ) |  | $ | (360  | )
|State                               |  |         |     |   |          |   | 946   |                     |  |   | (946   | ) |  |   |      |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|                                    |  | $       | (360 | ) |          | $ | 8,300 |                     |  | $ | (8,300 | ) |  | $ | (360  | )
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Fiscal 2001                         |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Federal                             |  | $       |     |   |          | $ | (649  | )                   |  | $ | 649    |   |  | $ |      |  
|State                               |  |         |     |   |          |   | (276  | )                   |  |   | 276    |   |  | $ |      |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|                                    |  | $       |     |   |          | $ | (925  | )                   |  | $ | 925    |   |  |   |      |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  



The Company recorded
an income tax provision of $911 for the 52-weeks ended January 31, 2004 which represents approximately 40% of pretax income. The Company recorded an income tax provision of $1,981 in the post emergence 43-weeks ended February 1, 2002, which results
from fresh start accounting and the creation of new cumulative temporary differences. The Company will report the tax benefits realized for tax purposes for the cumulative temporary differences that existed at the date of emergence, as well as for
the net operating loss carry forwards that existed at the date of emergence, as an addition to paid-in capital rather that a reduction in the tax provision in future statements of operations.



The Company recorded an income tax benefit of $360 for the nine weeks ended
April 6, 2002 which resulted from the realization of net operating loss carrybacks due to the enactment of the Job Creation and Workers Assistance Act of 2002. The benefit was realized by amending tax returns for the years ended June 29, 1996 and
June 28, 1997.



There was no provision for income taxes for the
52-weeks ended February 2, 2002.



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Income tax expense (benefit) differs from the amounts computed by applying the federal income tax
rate of 34% to income (loss) before income taxes as a result of the following:

|
|

|                                                                    |  |                              |   |  |                              |   |  |                        |    |  |                              |   
|------------------------------------------------------------------- |  | ---------------------------- | - |  | ---------------------------- | - |  | ---------------------- | -- |  | ---------------------------- | --
|                                                                    |  | SuccessorCompany             |   |  | SuccessorCompany             |   |  | PredecessorCompany     |    |  | PredecessorCompany           |   
|                                                                    |  | 52-weeksendedJanuary 31,2004 |   |  | 43-weeksendedFebruary 1,2003 |   |  | Nine weeksApril 6,2002 |    |  | 52-weeksendedFebruary 2,2002 |   
|Statutory federal rate                                              |  | 34.0                         | % |  | 34.0                         | % |  | 34.0                   | %  |  | (34.0                        | )%
|Increase (decrease) in income taxes resulting from:                 |  |                              |   |  |                              |   |  |                        |    |  |                              |   
|Change in valuation allowance                                       |  |                             |   |  |                             |   |  | (41.6                  | )  |  | 16.7                         |   
|Job Creation and Workers Assistance Act of 2002                     |  |                             |   |  |                             |   |  | (1.9                   | )  |  |                             |   
|Change in valuation allowance on post emergence deferred tax assets |  | 1.8                          |   |  | 3.8                          |   |  |                       |    |  |                             |   
|State net operating loss carrybacks and carryforwards               |  |                             |   |  |                             |   |  |                       |    |  | (2.3                         | ) 
|State and local income taxes, net of federal income taxes           |  | 4.1                          |   |  | 4.8                          |   |  | 5.0                    |    |  | (2.6                         | ) 
|Reorganization costs, net                                           |  |                             |   |  |                             |   |  | 2.6                    |    |  | 21.9                         |   
|Other, net                                                          |  | 0.2                          |   |  | 1.2                          |   |  |                       |    |  | 0.3                          |   
|                                                                    |  |                              |   |  |                              |   |  |                        |    |  |                              |   
|Effective income tax rate                                           |  | 40.1                         | % |  | 43.8                         | % |  | (1.9                   | )% |  |                             | % 
|                                                                    |  |                              |   |  |                              |   |  |                        |    |  |                              |   

|
|

Deferred income taxes reflect the net tax effect of operating loss and alternative minimum
tax credit carryforwards along with the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred
tax assets and liabilities are as follows:



|                                            |  |                  |         |   |                  |   |         |  
|------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                            |  | SuccessorCompany |         |   | SuccessorCompany |  
|                                            |  | January 31,2004  |         |   | February 1,2003  |  
|Deferred tax assets related to:             |  |                  |         |   |                  |   |         |  
|Alternative minimum tax credit carryforward |  | $                | 373     |   |                  | $ | 330     |  
|Deferred rent liabilities                   |  |                  | 596     |   |                  |   | 550     |  
|Accrued expenses                            |  |                  | 537     |   |                  |   | 835     |  
|Contingent note                             |  |                  | 607     |   |                  |   | 607     |  
|Merchandise inventories                     |  |                  | 2,146   |   |                  |   | 2,511   |  
|Fixed assets                                |  |                  | 1,668   |   |                  |   | 1,726   |  
|Net operating loss carryforwards            |  |                  | 5,556   |   |                  |   | 6,651   |  
|                                            |  |                  |         |   |                  |   |         |  
|Total deferred tax assets                   |  |                  | 11,483  |   |                  |   | 13,210  |  
|Valuation allowance                         |  |                  | (10,887 | ) |                  |   | (12,665 | )
|                                            |  |                  |         |   |                  |   |         |  
|Deferred tax assets                         |  |                  | 596     |   |                  |   | 545     |  
|Deferred tax liabilities                    |  |                  | 169     |   |                  |   | 169     |  
|                                            |  |                  |         |   |                  |   |         |  
|Deferred tax asset, net                     |  | $                | 427     |   |                  | $ | 376     |  
|                                            |  |                  |         |   |                  |   |         |  



The Company has
recorded a valuation allowance to fully reserve for the value of net deferred tax assets that existed at February 2, 2002Predecessor. Additionally, the Company has also recorded a valuation allowance to fully reserve for the value of net
deferred tax assets that existed upon emergence from bankruptcy.



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FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company has fully reserved for these amounts because the utilization of its net operating loss carryforwards is dependent upon sufficient future taxable
income, which is not reasonably assured. The Companys reorganization resulted in a modified capital structure by which SOP 90-7 required the Company to apply fresh start accounting. Under fresh start accounting, reversals of valuation reserves
recorded against deferred tax assets that existed as of the emergence date will result in an increase to paid-in capital. Consequently, the Company will recognize cash tax savings in the year of asset recognition without the corresponding benefit to
income tax expense. In the 52-weeks ended January 31, 2004 the Company had a deferred tax asset in the amount of $427, net, and for the 43-weeks ended February 1, 2003, the Company had a deferred tax asset in the amount of $376, net. The increase in
the deferred tax asset results in a direct increase to stockholders equity due to the Companys ability to utilize pre-emergence net operating loss benefits. The Company believes it will realize the benefit of the new deferred tax asset,
net, in future periods and therefore has not recorded a valuation allowance at this time.



The Company has made payments of $57 for estimated Alternative Minimum Taxes due for the 43-weeks ended February 1, 2003. Additionally, the Company made payments of $45 for estimated Alternative Minimum Taxes during
the 52-weeks ended January 31, 2004.



At January 31, 2004, the
Company has net operating loss (NOL) carryforwards for federal and state tax purposes of approximately $14,300, which will expire by the end of 2021. In addition to the NOL carryforwards, the Company also has Alternative Minimum Tax
carryforwards of $373, which have no expiration. The utilization of NOL carryforwards may be significantly limited by future events related to direct and/or indirect ownership changes of the Company.



(11)    Employee Benefit Plans



On March 20, 2002, the Company announced that the Bankruptcy Court confirmed
its Plan of Reorganization that was filed with the Bankruptcy Court on February 5, 2002. On April 9, 2002 the Plan of Reorganization became effective and the Company successfully emerged from Chapter 11. As of the Effective date of the Plan, all
existing stock and all stock options, employee stock purchase plans and stock option plans of the Predecessor Company were canceled.



|2002 |  | Stock Option PlanSuccessor Company
|---- |  | -----------------------------------

|
|

As provided in the Plan of Reorganization, the Company adopted a stock option plan, which
authorized the grant of up to 333,334 stock options to its employees. Under the plan, stock options may be granted for the purchase of its Common Stock at an exercise price of not less than 100% of the fair market value at the time of grant as
determined by the Board of Directors. The term of each option is also determined by the Board of Directors, but cannot be more than ten years from the date of grant. Options are exercisable in accordance with the Plan and generally vest at the rate
of 25% to 33% per year from the date of grant.



2002 Non
Employee Stock Option PlanSuccessor Company



The
Company adopted a non-employee Stock Option Plan, which authorized the grant of up to 300,000 Common Stock options to non-employee members of the Board of Directors. Under the Plan, options may be granted for the purchase of its Common Stock at an
exercise price not less than 100% of the fair market value of a share of Common Stock on the date of grant. Options are exercisable in accordance with the Plan and generally vest at the rate of 33% to 50% per year from the date of grant.



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FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



2003 Equity Incentive PlanSuccessor Company



The Company adopted the 2003 Equity Incentive Plan on January 27, 2003.
Stockholders approved the plan on July 16, 2003. Under this plan, 500,000 shares of Common Stock would be available for the settlement of the following types of awards: stock options; stock appreciation awards; restricted shares; deferred stock;
dividend equivalents; performance units; performance shares; and other stock based awards.



Stock option activity since the Company emerged from bankruptcy is as follows:



|                                                                 |  |                 |   |                                |                                         |      |                 |         |   |                                         |   |     
|---------------------------------------------------------------- |  | --------------- | - | ------------------------------ | --------------------------------------- | ---- | --------------- | ------- | - | --------------------------------------- | - | ----
|                                                                 |  | Fiscal 2003     |   | Successor Company 200243-weeks
|                                                                 |  | Numberof shares |   |                                | Weighted-averageexercise priceper share |      | Numberof shares |         |   | Weighted-averageexercise priceper share
|Outstanding at beginning of period                               |  | 470,000         |   |                                | $                                       | 3.63 |                 | 0       |   |                                         | $ | 0.00
|Granted                                                          |  | 287,000         |   |                                |                                         | 5.97 |                 | 474,600 |   |                                         |   | 3.63
|Exercised                                                        |  | (23,200         | ) |                                |                                         | 3.76 |                 | 0       |   |                                         |   | 0.00
|Forfeited                                                        |  | (31,650         | ) |                                |                                         | 4.22 |                 | (4,600  | ) |                                         |   | 3.76
|                                                                 |  |                 |   |                                |                                         |      |                 |         |   |                                         |   |     
|Outstanding end of period                                        |  | 702,150         |   |                                | $                                       | 4.55 |                 | 470,000 |   |                                         | $ | 3.63
|                                                                 |  |                 |   |                                |                                         |      |                 |         |   |                                         |   |     
|Exercisable at end of period                                     |  | 135,066         |   |                                | $                                       | 3.60 |                 | 0       |   |                                         |   | 0   
|                                                                 |  |                 |   |                                |                                         |      |                 |         |   |                                         |   |     
|Weighted-average fair value of options granted during the period |  |                 |   |                                | $                                       | 3.92 |                 |         |   |                                         | $ | 1.57
|Available for future grants at end of period                     |  | 407,984         |   |                                |                                         |      |                 | 163,334 |   |                                         |   |     
|                                                                 |  |                 |   |                                |                                         |      |                 |         |   |                                         |   |     



Information regarding
outstanding and exercisable options at January 31, 2004 is as follows:



|                         |  |                     |  |                                          |  |                               |       |                   |         |                               |   |     
|------------------------ |  | ------------------- |  | ---------------------------------------- |  | ----------------------------- | ----- | ----------------- | ------- | ----------------------------- | - | ----
|                         |  | Options Outstanding |  | Options Exercisable                     
|                         |  | NumberOutstanding   |  | Weighted-averageremainingcontractuallife |  | Weighted-averageexerciseprice |       | Numberexercisable |         | Weighted-averageexerciseprice
|Range of Exercise Prices |  |                     |  |                                          |  |                               |       |                   |         |                               |   |     
|January 31, 2004:        |  |                     |  |                                          |  |                               |       |                   |         |                               |   |     
|$2.75 to $3.76           |  | 450,450             |  | 8.3                                      |  | $                             | 3.50  |                   | 132,391 |                               | $ | 3.58
|4.72 to 6.38             |  | 248,900             |  | 9.3                                      |  |                               | 6.30  |                   | 2,675   |                               |   | 4.72
|10.50 to 22.40           |  | 2,800               |  | 9.6                                      |  |                               | 18.64 |                   | 0       |                               |   | 0.00
|                         |  |                     |  |                                          |  |                               |       |                   |         |                               |   |     
|$2.75 to $22.40          |  | 702,150             |  | 8.7                                      |  | $                             | 4.55  |                   | 135,066 |                               | $ | 3.60
|                         |  |                     |  |                                          |  |                               |       |                   |         |                               |   |     



Restricted Stock
Awards



As provided in the Plan of Reorganization, the
Company issued 150,000 shares of the new Common Stock to certain members of management, which vest ratably over a four-year period. At the date of the grant, the market value of the award was recorded in common stock and additional paid-in capital;
an offsetting amount is recorded as a component of stockholders equity in unearned restricted stock awards. Compensation cost is included in results of operations over the vesting period. Expense relating to outstanding restricted stock award
for the 52-weeks ended January 31, 2004 and the 43-weeks ended February 1, 2003 was $131 and $118, respectively.



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FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Incentive Savings Plan



The Incentive Savings Plan (the ISP Plan) is a defined contribution plan sponsored by the Company for all
eligible employees. Participants in the ISP Plan may elect to contribute between 2% and 13% of their pre-tax base salary, subject to limitations imposed by the Internal Revenue Service. The Company makes discretionary matching contributions to the
ISP Plan at the rate of 33% of the first 6% of the participants contribution. In Fiscal 2003 the Companys discretionary matching contributions to the ISP Plan were $189. For Successor Company 2002 43-weeks, Predecessor Company 2002 nine
weeks, and Fiscal 2001, the Companys discretionary matching contributions to the ISP Plan were $152, $38 and $235, respectively. The ISP Plan also allows for a discretionary base contribution to be made by the Company only if the Company has
current or accumulated net profits. No discretionary base contributions have been made by the Company to date.



Deferred Compensation Plan



In January 2003 the Companys Board of Directors approved a Supplemental Incentive Savings Plan (the Supplemental Plan). The Supplemental
Plan is intended to be an un-funded deferred compensation arrangement for a select group of management or highly compensated employees. The Supplemental Plan is intended to restore eligible participants the benefits to which they would have been
entitled under the Companys ISP Plan but were limited because of Internal Revenue Code rules and regulations.



(12)    Fair Value of Financial Instruments



The Companys financial instruments at January 31, 2004 and February 1, 2003 include accounts payable and debt. The Company has assumed that the
carrying value of trade accounts payable approximates fair value because of the short period in which these liabilities are settled. The Company believes the carrying value of the debt approximates fair value due to the variable rate of interest on
this instrument.



(13)    New Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 142 Goodwill and Other Intangible Assets, which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supercedes Accounting Principles Board Opinion
(APB) No. 17, Intangible Assets. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001. The Company does not have goodwill or intangible assets recorded in the financial statements;
therefore, the adoption of SFAS No. 142 during the first quarter of Fiscal 2002 did not have an impact on its consolidated financial position or results of operations.



In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses
financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) normal use of the asset. The Company adopted the provisions of SFAS No. 143 and it did not have a material impact on its consolidated financial position or results of operations.



In August 2001, the FASB issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, although it retains many of the fundamental provisions of that Statement. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001, thereby applying to



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Fiscal 2002. In conjunction with fresh-start reporting, the Company recorded a $11,760 adjustment to fixed assets to reflect the excess of book value over
enterprise value. The Company adopted the provisions of SFAS No. 144 and it did not have a material impact on its consolidated financial position or results of operations.



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. Specifically, SFAS 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, an amendment of APB Opinion No. 30 and SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements, as these two standards required that all gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item. Consequently, such gains and losses will
now be classified as extraordinary only if they meet the criteria for extraordinary treatment set forth in APB Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 145 also rescinds SFAS No. 44 Accounting for Intangible Assets of Motor Carriers, an amendment of Chapter 5 of ARB No. 43 and an interpretation of APB
Opinions 17 and 30, because the event to which that Statement relates is no longer relevant. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as such transactions, and also makes certain technical corrections to a number of existing pronouncements. The Company was required to adopt this statement due to the application of
fresh-start accounting. The effect of this statement on the Company is the net gain associated with the plan of reorganization and fresh-start adjustments are reported as a component of operations in the nine weeks ended April 6, 2002.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement changes the timing of recognition for certain exit costs associated with restructuring activities, so that certain exit costs would be recognized over the period in which the
restructuring activities occur. Currently, exit costs are recognized when we commit to a restructuring plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002 and could result in the Company recognizing the
cost of future restructuring activities over a period of time as opposed to as a single event. The Company did not record any exit or disposal activities in Fiscal 2003.



In September 2002, the Emerging Issues Task Force (EITF) issued 02-16 Accounting by a Customer (Including
a Reseller) for Certain Consideration Received from a Vendor which addresses the accounting for cash retailers receive from vendors. The EITF concluded cash received from a vendor is presumed to be a reduction of purchase price of goods unless
the vendor receives an identifiable benefit or there is reimbursement of a specific incremental identifiable cost. Additionally, rebates are to be recorded when it is probable and reasonably estimable and allocated to transactions giving rise to the
rebate. The Companys accounting policies relating to cash received from vendors are consistent with the conclusions reached by the EITF.



In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements of Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires the recognition of a liability for certain guarantee obligations issued or modified after December 31, 2002. FIN 45 also clarifies disclosure requirements to
be made by a guarantor of certain guarantees. The disclosure provisions of FIN 45 were effective for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions and the accounting requirements of FIN 45 as of February
1, 2003 and it did not have an impact on its consolidated financial position or results of operations.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of
FASB Statement 123. SFAS No. 148 amends FASB Statement



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



No. 123, Accounting for Stock-Based Compensation and provides alternative methods for accounting for a change by registrants to the fair value
method of accounting for stock-based compensation. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosure in the significant accounting policy footnote of both the annual and interim financial statements
of the method of accounting for stock-based compensation and the related pro-forma disclosures when the intrinsic value method continues to be used. SFAS No. 148 is effective for fiscal years ended after December 15, 2002, and disclosures are
effective for the first quarter beginning after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148.



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46
addresses how to identify variable interest entities and provides guidance as to how a company may assess its interest in a variable interest entity for purposes of deciding whether consolidation of that entity is required. FIN 46 is effective for
all variable interest entities created after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim period or annual period beginning after June
15, 2003. However, in October 2003, the FASB deferred the effective date of FIN 46 to the end of the first interim or annual period ending after December 15, 2003 for those arrangements involving special purpose entities entered into prior to
February 1, 2003. All other arrangements with the scope of FIN 46 are subject to its provisions beginning in 2004. Additionally the FASB issued Interpretation No. 46R, Consolidation of Variable Interest EntitiesA Modification of FASB
Interpretation No. 46, which amends Interpretation No. 46. The Company does not have any interests in a variable interest entity; therefore, the adoption of this provision did not have an impact on its consolidated financial position or
results of operations.



In April 2003, the FASB issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement is effective for contracts entered into or
modified after June 30, 2003. The Company has not entered into any such agreements after June 30, 2003; therefore, the adoption of this provision did not have an impact on its consolidated financial position or results of operations.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is
effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has not issued any financial instruments which meet
this criteria; therefore, the adoption of this provision did not have an impact on its consolidated financial position or results of operations.



In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits to
improve financial statement disclosures for defined benefit plans. SFAS 132 requires more detailed disclosures about plan assets, benefit obligations, cash flows, benefit costs and other relevant information. The disclosures are generally effective
for fiscal years ending after December 31, 2003. The Company does not offer Pension and Other Postretirement Benefits as described under SFAS 132; therefore, the adoption of this provision did not have an impact on its consolidated financial
position or results of operations.



(14)    Related-party Transactions



As described in the Plan of Reorganization, 90% of the new Common Stock was distributed to unsecured creditors, 5% was distributed to the Companys management and 5% was distributed to old equity shareholders.



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



One entity has an ownership interest of more than 10%. Purchases from that vendor in Fiscal 2003 were $3,063 and amounts owed were $106 at January 31, 2004.
There were no purchases from that entity during Fiscal 2002 therefore no amounts were owed at February 1, 2003.



(15)    Contingencies



On March 3, 2004, Midwest One Distribution Company filed a lawsuit against us in the Circuit Court of the Eighteen Judicial Circuit of DuPage County,
Illinois, captioned Midwest One Distribution Co. vs. Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd. The lawsuit alleges that the Company breached a distribution agreement between the parties that terminated on January
31, 2004 by failing to pay certain invoices from Midwest One for certain services and/or expenses allegedly performed or incurred by Midwest One. Midwest One seeks damages of approximately $4.8 million and an accounting of all distribution services
for which Midwest One was entitled to compensation under the distribution agreement. The Company believes that it has meritorious defenses and counterclaims and intends to pursue them vigorously.



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##### Table of Contents

FACTORY CARD OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(16)    Quarterly Financial Information (unaudited)



Following is a summary of unaudited quarterly information:



|                                                  |  |                             |         |   |                           |   |              |                            |  |                              |        |  |                              |        |   |  |   |        |  
|------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ------------ | -------------------------- |  | ---------------------------- | ------ |  | ---------------------------- | ------ | - |  | - | ------ | -
|                                                  |  |                             |         |   | SuccessorCompany          |   |              | SuccessorCompany           |  | SuccessorCompany             |        |  | SuccessorCompany             |       
|                                                  |  |                             |         |   | FirstQuarter              |   |              | SecondQuarter              |  | ThirdQuarter                 |        |  | FourthQuarter                |       
|Fiscal 2003:                                      |  |                             |         |   | 13 weeksendedMay 3,2003   |   |              | 13 weeksendedAugust 2,2003 |  | 13 weeksendedNovember 1,2003 |        |  | 13 weeksendedJanuary 31,2004 |       
|Total sales                                       |  |                             |         |   |                           | $ | 54,541       |                            |  | $                            | 59,835 |  | $                            | 51,353 |   |  | $ | 56,906 |  
|Gross profit                                      |  |                             |         |   |                           |   | 18,527       |                            |  |                              | 21,962 |  |                              | 18,731 |   |  |   | 18,043 |  
|Selling, general and administrative expenses      |  |                             |         |   |                           |   | 17,995       |                            |  |                              | 17,666 |  |                              | 17,232 |   |  |   | 18,958 |  
|Depreciation                                      |  |                             |         |   |                           |   | 448          |                            |  |                              | 486    |  |                              | 466    |   |  |   | 557    |  
|Interest expense                                  |  |                             |         |   |                           |   | 343          |                            |  |                              | 237    |  |                              | 283    |   |  |   | 319    |  
|Income (loss) before income tax expense (benefit) |  |                             |         |   |                           |   | (259         | )                          |  |                              | 3,573  |  |                              | 750    |   |  |   | (1,791 | )
|Income tax expense (benefit)                      |  |                             |         |   |                           |   | (104         | )                          |  |                              | 1,429  |  |                              | 300    |   |  |   | (714   | )
|Net income (loss)                                 |  |                             |         |   |                           | $ | (155         | )                          |  | $                            | 2,144  |  | $                            | 450    |   |  | $ | (1,077 | )
|Earnings (loss) per sharebasic                   |  |                             |         |   |                           | $ | (0.05        | )                          |  | $                            | 0.74   |  | $                            | 0.15   |   |  | $ | (0.36  | )
|Earnings (loss) per sharediluted                 |  |                             |         |   |                           | $ | (0.05        | )                          |  | $                            | 0.70   |  | $                            | 0.13   |   |  | $ | (0.36  | )
|                                                  |  |                             |         |   |                          
|                                                  |  | PredecessorCompany          |         |   | SuccessorCompany          |   |              | SuccessorCompany           |  | SuccessorCompany             |        |  | SuccessorCompany             |       
|                                                  |  | First Quarter               |         |   | SecondQuarter             |   | ThirdQuarter |                            |  | FourthQuarter                |       
|Fiscal 2002 [Combined]:                           |  | Nine weeksendedApril 6,2002 |         |   | Four weeksendedMay 4,2002 |   |              | 13 weeksendedAugust 3,2002 |  | 13 weeksendedNovember 2,2002 |        |  | 13 weeksendedFebruary 1,2003 |       
|Total sales                                       |  | $                           | 40,837  |   |                           | $ | 18,187       |                            |  | $                            | 59,733 |  | $                            | 48,942 |   |  | $ | 58,837 |  
|Gross profit                                      |  |                             | 13,846  |   |                           |   | 6,590        |                            |  |                              | 21,925 |  |                              | 16,402 |   |  |   | 18,347 |  
|Selling, general and administrative expenses      |  |                             | 12,212  |   |                           |   | 5,697        |                            |  |                              | 17,869 |  |                              | 15,919 |   |  |   | 16,387 |  
|Depreciation                                      |  |                             | 1,030   |   |                           |   | 100          |                            |  |                              | 356    |  |                              | 393    |   |  |   | 652    |  
|Reorganization items                              |  |                             | (18,840 | ) |                           |   |             |                            |  |                              |       |  |                              |       |   |  |   |       |  
|Interest expense                                  |  |                             | 374     |   |                           |   | 154          |                            |  |                              | 412    |  |                              | 419    |   |  |   | 383    |  
|Income (loss) before income tax expense (benefit) |  |                             | 19,070  |   |                           |   | 639          |                            |  |                              | 3,288  |  |                              | (329   | ) |  |   | 925    |  
|Income tax expense (benefit)                      |  |                             | (360    | ) |                           |   | 249          |                            |  |                              | 1,311  |  |                              | (132   | ) |  |   | 553    |  
|Net income (loss)                                 |  | $                           | 19,430  |   |                           | $ | 390          |                            |  | $                            | 1,977  |  | $                            | (197   | ) |  | $ | 372    |  
|Earnings (loss) per sharebasic                   |  |                             |         |   |                           | $ | 0.13         |                            |  | $                            | 0.69   |  | $                            | (0.07  | ) |  | $ | 0.13   |  
|Earnings (loss) per sharediluted                 |  |                             |         |   |                           | $ | 0.13         |                            |  | $                            | 0.68   |  | $                            | (0.07  | ) |  | $ | 0.13   |  



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##### Table of Contents

INDEPENDENT AUDITORS REPORT



The Board of Directors and Stockholders

Factory Card & Party Outlet Corp.:



Under date of March 22, 2002, except as to the first paragraph of note 6, which is as of April 8, 2002, we reported on the consolidated statements of
operations, stockholders deficit and cash flows of Factory Card & Party Outlet Corp. (formerly know as Factory Card Outlet Corp.) and subsidiary for the 52 weeks ended February 2, 2002, which are included in this Form 10-K. In connection
with our audit of the aforementioned consolidated financial statements, we also audited the related financial statement schedule for the 52 weeks ended February 2, 2002 as listed in Item 15(a)(2) of this Form 10-K. The financial statement schedule
is the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statement schedule based on our audit.



In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.



/s/    KPMG LLP



Chicago, Illinois

March 22, 2002



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##### Table of Contents

Schedule I



FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONDENSED FINANCIAL
INFORMATION OF FACTORY CARD & PARTY OUTLET CORP.



BALANCE SHEETS

(Dollar amounts in thousands, except share data)



|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | - | --------------- | - | ------ | -
|                                                                                                                                                                                       |  | January 31,2004 |        |   | February 1,2003 |  
|A S S E T S                                                                                                                                                                            |  |                 |        |   |                 |   |        |  
|                                                                                                                                                                                       |  |                
|Current assets:                                                                                                                                                                        |  |                 |        |   |                 |   |        |  
|Due from subsidiary                                                                                                                                                                    |  | $               |       |   |                 | $ |       |  
|Note receivablesubsidiary                                                                                                                                                             |  |                 |       |   |                 |   |       |  
|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  
|Total current assets                                                                                                                                                                   |  |                 |       |   |                 |   |       |  
|Investment in subsidiary                                                                                                                                                               |  |                 | 17,947 |   |                 |   | 15,154 |  
|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  
|Total assets                                                                                                                                                                           |  | $               | 17,947 |   |                 | $ | 15,154 |  
|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  
|                                                                                                                                                                                       |  |                
|S T O C K H O L D E R S    E Q U I T Y                                                                                                                                                |  |                 |        |   |                 |   |        |  
|                                                                                                                                                                                       |  |                
|Common stock, $0.01 par value. Voting class-authorized 10,000,000 shares: 3,074,082 and 3,021,820 shares issued and outstanding at January 31,
2004 and February 1, 2003, respectively |  | $               | 31     |   |                 | $ | 30     |  
|Unearned restricted stock awards                                                                                                                                                       |  |                 | (275   | ) |                 |   | (446   | )
|Additional paid-in capital                                                                                                                                                             |  |                 | 14,287 |   |                 |   | 13,028 |  
|Accumulated earnings                                                                                                                                                                   |  |                 | 3,904  |   |                 |   | 2,542  |  
|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  
|Total stockholders equity                                                                                                                                                             |  | $               | 17,947 |   |                 | $ | 15,154 |  
|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  





See accompanying notes to condensed financial information.



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##### Table of Contents

Schedule I



FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONDENSED FINANCIAL
INFORMATION OF FACTORY CARD & PARTY OUTLET CORP.



STATEMENTS OF OPERATIONS

(Dollar amounts in thousands)



|                                                   |  |                                      |       |                                       |   |                                     |  |   |                                       |   |  |   |         |  
|-------------------------------------------------- |  | ------------------------------------ | ----- | ------------------------------------- | - | ----------------------------------- |  | - | ------------------------------------- | - |  | - | ------- | -
|                                                   |  | For the 52-weeks endedJanuary 312003 |       | For the 43-weeks endedFebruary 1,2003 |   | For the Nineweeks endedApril 6,2002 |  |   | For the 52-weeks endedFebruary 2,2002 |  
|                                                   |  | SuccessorCompany                     |       | SuccessorCompany                      |   | PredecessorCompany                  |  |   | PredecessorCompany                    |  
|Royalty income                                     |  | $                                    |      |                                       | $ |                                    |  | $ | 612                                   |   |  | $ | 3,420   |  
|Interest incomesubsidiary note receivable         |  |                                      |      |                                       |   |                                    |  |   | 619                                   |   |  |   | 5,571   |  
|Equity in net income (loss) of subsidiary          |  |                                      | 1,362 |                                       |   | 2,542                               |  |   | (3,350                                | ) |  |   | (13,065 | )
|Operating expenses                                 |  |                                      |      |                                       |   |                                    |  |   | 349                                   |   |  |   | 1,457   |  
|Plan of reorganization and fresh start adjustments |  |                                      |      |                                       |   |                                    |  |   | 21,898                                |   |  |   |        |  
|                                                   |  |                                      |       |                                       |   |                                     |  |   |                                       |   |  |   |         |  
|Net income (loss)                                  |  | $                                    | 1,362 |                                       | $ | 2,542                               |  | $ | 19,430                                |   |  | $ | (5,531  | )
|                                                   |  |                                      |       |                                       |   |                                     |  |   |                                       |   |  |   |         |  





See accompanying notes to condensed financial information.



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##### Table of Contents

Schedule I



FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONDENSED FINANCIAL
INFORMATION OF FACTORY CARD & PARTY OUTLET CORP.



STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)



|                                                                                                   |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------- | - | ------ | ------------------------------------ |  | - | ------------------------------------- | - |  | - | ------ | -
|                                                                                                   |  | For the 52-weeks endedJanuary 1,2003 |        |   | For the 43-weeks endedFebruary 1,2003 |   |        | For the Nineweeks ended April 6,2002 |  |   | For the 52-weeks endedFebruary 2,2002 |  
|                                                                                                   |  | SuccessorCompany                     |        |   | SuccessorCompany                      |   |        | PredecessorCompany                   |  |   | PredecessorCompany                    |  
|Cash flows from operating activities:                                                              |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|Net income (loss)                                                                                  |  | $                                    | 1,362  |   |                                       | $ | 2,542  |                                      |  | $ | 19,430                                |   |  | $ | (5,531 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|Amortization of deferred compensation                                                              |  |                                      | 131    |   |                                       |   | 118    |                                      |  |   |                                      |   |  |   |       |  
|(Increase) decrease in investment in subsidiary                                                    |  |                                      | (2,793 | ) |                                       |   | (5,114 | )                                    |  |   | (93,522                               | ) |  |   | 13,065 |  
|Decrease in due from subsidiary                                                                    |  |                                      |       |   |                                       |   |       |                                      |  |   | 12,179                                |   |  |   |       |  
|Tax benefit of pre-confirmation operating losses                                                   |  |                                      | 962    |   |                                       |   | 2,357  |                                      |  |   |                                      |   |  |   |       |  
|                                                                                                   |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|Net cash provided by (used in) operating activities                                                |  |                                      | (338   | ) |                                       |   | (97    | )                                    |  |   | (61,913                               | ) |  |   | 7,534  |  
|                                                                                                   |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|Cash flow provided by (used in) investing activities:                                              |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|(Increase) decrease in note receivable from subsidiary                                             |  |                                      |       |   |                                       |   |       |                                      |  |   | 61,913                                |   |  |   | (7,534 | )
|                                                                                                   |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|Net cash provided by (used in) investing activities                                                |  |                                      |       |   |                                       |   |       |                                      |  |   | 61,913                                |   |  |   | (7,534 | )
|                                                                                                   |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|Cash flow provided by financing activities:                                                        |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|Cash received from exercise of management stock warrants                                           |  |                                      | 338    |   |                                       |   | 97     |                                      |  |   |                                      |   |  |   |       |  
|                                                                                                   |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|Net cash provided by financing activities                                                          |  |                                      | 338    |   |                                       |   | 97     |                                      |  |   |                                      |   |  |   |       |  
|                                                                                                   |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|Net increase (decrease) in cash                                                                    |  |                                      |       |   |                                       |   |       |                                      |  |   |                                      |   |  |   |       |  
|Cash at end of year                                                                                |  | $                                    |       |   |                                       | $ |       |                                      |  | $ |                                      |   |  | $ |       |  
|                                                                                                   |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|Supplemental cash flow information:                                                                |  |                                      |        |   |                                       |   |        |                                      |  |   |                                       |   |  |   |        |  
|Income taxes refunded                                                                              |  | $                                    |       |   |                                       | $ | (360   | )                                    |  | $ |                                      |   |  | $ |       |  
|Stock issued (successor company)                                                                   |  |                                      |       |   |                                       |   |       |                                      |  |   | (10,040                               | ) |  |   |       |  
|Fair value adjustments                                                                             |  |                                      |       |   |                                       |   |       |                                      |  |   | 10,406                                |   |  |   |       |  
|Stock retirement (predecessor company) and debt discharge                                          |  |                                      |       |   |                                       |   |       |                                      |  |   | (22,828                               | ) |  |   |       |  
|Unearned restricted stock awards                                                                   |  | $                                    | 275    |   |                                       | $ | 446    |                                      |  | $ | 564                                   |   |  | $ |       |  



See accompanying notes
to condensed financial information.



S-4



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



NOTES TO CONDENSED FINANCIAL INFORMATION OF FACTORY CARD &

PARTY OUTLET CORP.

(Dollar amounts in thousands)



(1)    Basis of Accounting



The Condensed Financial Information of Factory Card & Party Outlet Corp. (the Company) has been prepared pursuant to Securities and
Exchange Commission rules and regulations and should be read in conjunction with the Consolidated Financial Statements and Notes thereto of Factory Card & Party Outlet Corp. and Subsidiary as of January 31, 2004 and February 1, 2003 (Successor
Company), and for the 52-weeks ended January 31, 2004, the 43-weeks ended February 1, 2003 (Successor Company), the nine weeks ended April 6, 2002, and the 52-weeks ended February 2, 2002 (Predecessor Company). The Companys Condensed Financial
Information has been prepared on an unconsolidated basis. The Companys investment in and amounts due from subsidiary are recorded on the equity basis. Due to the fact that there are certain restrictions on the Companys assets and the
Company has guaranteed the New Loan Agreement between our subsidiary and Wells Fargo Retail Finance, LLC, the Company is required to file Condensed Financial Information of Factory Card & Party Outlet Corp.



(2)    Reorganization and Emergence from Chapter 11



On March 23, 1999, the Company and its subsidiary, Factory Card Outlet of
America, Ltd., filed a petition for reorganization under chapter 11 of title 11 of the United States Code. The Company filed a plan of reorganization and related disclosure statement with the bankruptcy court on February 5, 2002. The bankruptcy
court confirmed the plan of reorganization on March 20, 2002 and on April 9, 2002 (the Effective Date) the Company successfully emerged from Chapter 11. See Note 1 of the Notes to Consolidated Financial Statements.



(3)    Guarantees



The Company has guaranteed the credit and debt agreements between its
subsidiary and various lenders. For information related to the agreements, see Notes 6 and 7 of the Notes to Consolidated Financial Statements.



(4)    Notes ReceivableSubsidiary



During Fiscal 1997, the Companys subsidiary issued a note payable to the Company. Interest was accrued quarterly based on the prime lending rate
plus two percent per year. The note and any accrued interest was due and payable on demand. Pursuant to the Plan of Reorganization, the current assets Note ReceivableSubsidiary and Due From Subsidiary were deemed to be contributed to capital
under the reorganized Company.



(5)    Royalty and
Licensing Agreement



In June 1997, the Company entered
into a Royalty and Licensing Agreement (Agreement) with its subsidiary. The Agreement grants the subsidiary the right to use trademarks and tradenames owned by the Company in exchange for a royalty fee of one and one-half percent of net
sales from operations. Pursuant to the Plan of Reorganization, the Agreement was deemed null and void on the Effective Date. In the 52-weeks ended January 31, 2004 and the 43-weeks ended February 1, 2003, the Company did not record any Royalty
Income.



S-5